4 States Raising Aggressive New Taxes on High Earners — and 1 That’s Already Making Money

If you are a high earner living in a blue zone, your tax bill may be higher in a few years. Many states have proposals to tax the wealthy more.

These proposals have the potential to impact where Americans choose to live, work and retire.

After the proposals

Certain states are looking for ways to make money.

As Lucy Dadayan, principal research fellow and state tax expert at the Tax Policy Center at the Urban Institute, explained to CNBC:

“There is a push across our country to rebalance federal tax codes, following Trump’s sweeping tax bill that further skewed the tax code in favor of the wealthiest Americans.”

Inflation has squeezed middle- and low-income families, causing political pressure to increase the tax burden.

Meanwhile, states that have already raised taxes on the wealthy are pointing to better-than-expected results.

Massachusetts voters approved a 4% surtax on income over $1 million by 2022, and the tax generated nearly $3 billion in annual revenue in its second fiscal year. That’s more than double the initial estimates. Democratic Alliance leaders say this confirms predictions of massive wealth flight.

4 states looking to tax the rich

California’s proposed Billionaire Tax Act would impose a one-time tax of 5% on the entire net worth of residents worth $1 billion or more. And the proposal will be a tax asset instead of just income.

Virginia’s new Democratic-controlled legislature proposed a 10% tax bracket for those earning more than $1 million a year. Currently, all income over $17,000 is taxed at the same rate of 5.75%.

A separate Virginia proposal would add a state-level investment income tax to capital gains, dividends and rental income for those with adjusted gross income above $500,000.

In Washington state – currently tax-free – legislators are proposing a 9.9% tax on income over $1 million. In 2022, the state imposed a 7% tax on long-term gains above $250,000, and a state Supreme Court decision upheld that, potentially opening the door to a broader income tax.

Michigan’s Invest in MI Kids measure would add a 5% annual income tax for single filers earning more than $500,000 and joint filers earning more than $1 million, starting in 2027.

Read more about states that lower tax burdens on their residents in “9 States That Already Cut Income Taxes (In Some Circumstances Surprisingly).”

Should you consider relocating to save on taxes?

Moving from a state with a top 10% tax rate to one with a very low tax rate could save a millionaire $100,000 a year. In ten years, that’s a huge amount.

But think about what you would be leaving behind. Family relationships, professional networks and career opportunities don’t go with you. If your industry is concentrated in high-tax states such as technology in California or finance in New York, relocating may hinder your earning potential.

Those taxes also fund utilities. Countries with higher rates tend to provide better public schools, infrastructure and social programs for children and older adults.

Also, residency rules can be complicated. Some states are becoming increasingly aggressive about auditing former residents who say they have moved. Maintaining a second home, maintaining business commitments or spending too many days in your old home may still result in a tax liability.

High earners in states proposing aggressive new taxes should understand their exposure and potential changes to long-term planning.

Never make a move based on tax rates alone. A situation that looks good for taxes may be miserable in your real life.