More states want to tax the rich, which could boost munis

Bloomberg News

State legislatures have been unusually active shaking up their tax policy in fiscal year 2027. 

Seventeen states, from the Midwest to Florida, have considered cutting, capping or eliminating property taxes. Other states are cutting income tax rates.

But in the Northeast and the West Coast, some Democratic Party states are on a different trajectory: tax hikes for the wealthy.

The State Revenue Alliance has counted roughly 40 bills this year that would levy taxes on the wealthy, according to Communications Director Jonathan Huskey. They include taxes on capital gains, estates, mansions, high-incomes, wealth and wealth proceeds. 

High-income wealth taxes, one of the most popular approaches, fit easily into existing income tax codes, noted S&P Global Ratings analyst Savannah Gilmore. 

High-income wealth taxes may promote interest in tax-exempt bonds.

Maine included a 2% income tax on high earners in its fiscal 2027 budget, which is projected to raise $133 million annually.

Rhode Island Gov. Dan McKee proposed a similar wealth tax in his executive budget. The proposal received pushback from businesses, Republicans as well as from progressive Democratic lawmakers who argued it didn't go far enough.

A committee in the Rhode Island House has advanced a budget with McKee's 3% tax on income over $1 million, which is projected to generate $135 million per year. 

Washington's new wealth tax is projected to generate $3.5 billion, Huskey said, although it appears voters will have to approve the tax in November. Washington did not previously have an income tax.

Hawaii lawmakers in May voted to create a higher income tax bracket and cut income taxes for the lower brackets. 

In California, voters will consider a different approach to a wealth tax in November. A ballot initiative would levy a one-time tax on billionaires' assets. 

In New York City, lawmakers proposed an income tax on high earners to plug the city's budget deficit that needed state approval; instead, the state agreed to a "pied-a-terre" tax on luxury second homes. New York already has a "mansion tax" on high value real estate transactions. 

Many states in the Northeast will have a wealth tax by the end of 2026, Huskey said. Massachusetts passed a tax on income above $1 million in 2022, Maryland instituted one last year, and Vermont taxes unrealized capital gains.

States have been "clamoring for additional revenues" since COVID-era federal aid expired, S&P Managing Director Geoff Buswick said. But wealth taxes will have a noteworthy budgetary impact. 

"From cannabis charges to gaming, online sports betting, some digital ads ...if you throw all those things that states have been doing more recently, these millionaires' taxes are a bigger component of the budget than any of those others," Buswick said.

The concept of wealth taxes has gained popularity in some regions for the better part of the last decade — Sen. Elizabeth Warren made a 2% wealth tax a centerpiece of her 2020 presidential campaign and New York City Mayor Zohran Mamdani won his office last year on a "Tax the Rich" platform. 

But there are likely several factors that inspired the tax's popularity with legislators. The most recent motivator was the One Big Beautiful Bill Act, according to Brian Daniels, director of Rhode Island's Office of Management and the Budget.

"H.R.1 really forced our hand on this," Daniels said in a budget briefing in January.

The federal revenue squeeze on states made a wealth tax look more appealing, Huskey said. 

"There is a national reaction to what the federal government did with the One Big Beautiful Bill," Huskey said. "We have big needs and we can't do what we did after the Great Recession and just cut [expenditures as] our way out of this."

Wealth taxes are also appealing revenue raisers in an era where the cost of living is top of mind for legislators, Buswick said. 

"I think we've seen states trying to give a tax benefit or a tax relief to those that may need it more," Buswick said. "In turn, in some places, leads to tax policy changes that may try to get more from those who have more."

Additionally, taxes on the wealthy are becoming more appealing as economists and lawmakers fear that artificial intelligence will exacerbate income inequality, Huskey said. 

Plus, states have seen an enviable example of a wealth tax in Massachusetts.

Massachusetts voters approved a 4% surtax on income above $1 million in 2022. The "Fair Share Tax" was projected to generate $2 billion per year, with proceeds dedicated to education and public transit.

The tax has exceeded projections. In May, the commonwealth's department of revenue announced the tax generated $3.1 billion in fiscal 2026, with two months left.

Huskey described Massachusetts' tax as a "wild success," and Buswick said it likely inspired this year's new wealth taxes.

"What you're seeing are some of the neighbors, the Maines, the Rhode Islands, saying, 'Hey, if they can do it and get a little more revenue that way, should we do the same?'" Buswick said.

Opponents of wealth taxes — in Rhode Island, New York and across the country — argue they inspire high earners to move out of the state. But so far, Massachusetts hasn't seen a mass exodus of millionaires. 

Buswick said there's "no clear evidence" that wealth taxes cause high earners to move. People move because of their jobs, families, age, or even weather, Buswick said; it would be hard to prove that a tax is driving people out of a state. 

Huskey said the only evidence that taxes drive people to move is anecdotal. 

"There's always somebody who says that they move, right? But in general, taxes have nothing to do with migration," Huskey said 

"While many politicians and pundits may claim that tax-and-spend policies are what Americans want, the reality is that, year after year, there is steady movement from high-tax states to more fiscally responsible ones," according to a report from the National Taxpayers Union Foundation. "Taxpayers want to live in states that do not treat them as endless sources of funding for politicians' pet projects."

A study from the State Revenue Alliance and Institute for Policy Studies found there are more millionaires in Massachusetts today than there were before the Fair Share Tax, and that those millionaires' combined wealth has grown. 

The policies supported by a wealth tax make the state more attractive to high earners and allow it to support a stronger economy with more jobs, Huskey added.