Millionaire tax wave could hit more than half of high earners

California’s proposed wealth tax may command the spotlight, but a broader push by states to adopt so-called “millionaire taxes” could have a much larger impact on the nation’s top earners.

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Currently, six states plus the District of Columbia have enacted some form of a millionaire tax, while seven more are actively considering proposals. Together, these 14 jurisdictions are home to more than half of the nation’s millionaire earners, according to IRS data and a Financial Planning review of state legislation.

While wealthy residents are unlikely to support such taxes, financial advisors say there’s generally “more of a stomach” for additional income-based taxes compared to total net worth taxes, like the one under consideration in California.

Legislators in Washington, Illinois, Pennsylvania, Rhode Island, Michigan, Virginia and Hawaii have all put forward various types of millionaire taxes for consideration.

In Washington, one of nine states nationwide without an income tax, lawmakers have proposed a 9.9% surcharge on income above $1 million. Voters in the state have repeatedly rejected similar measures, most recently in 2010, when a proposal to tax adjusted gross income above $200,000 for individuals and $400,000 for married couples failed at the ballot box. Even so, experts say the proposal stands a strong chance of clearing the legislature before the session ends next month.

Washington Gov. Bob Ferguson included a version of the millionaire tax in his December budget proposal, but said last week he would not sign it unless more of the estimated $3.5 billion in revenue is directed toward sales tax exemptions, business tax relief and an expansion of the Working Families Tax Credit.

A handful of other states have proposed millionaire taxes in a bid to fund key budget items.

In Illinois, House Speaker Emanuel “Chris” Welch and former Gov. Pat Quinn have voiced support for a millionaire tax. Legislation to amend the Illinois Constitution to allow progressive taxation and levy a 3% surcharge on income above $1 million is currently under consideration in the state House.

Pennsylvania lawmakers introduced a similar proposal, which seeks to impose a 4% surcharge on income above $1 million.

In Rhode Island, Gov. Dan McKee is pushing to lift the tax rate on income above $1 million to 8.99%, up three points, in his budget plan. The proposal sets a higher threshold than a rival plan backed by labor leaders that would apply a surtax to income above $640,000. McKee, once opposed to higher taxes on the wealthy, now points to budget strains due to federal cuts to Medicaid, food aid and other programs under President Donald Trump.

In Michigan, the “Invest in MI Kids” ballot initiative would amend the state constitution to levy a 5% surtax on income above $500,000 for single filers and $1 million for joint filers, with revenue earmarked for K-12 education.

Virginia legislators are also proposing a 10% tax on income above $1 million to fund schools, child care and affordable housing, while a bill introduced last month in Hawaii would impose a 3% surtax on income above $1 million for joint filers and $500,000 for individuals.

Together, the proposals could impact nearly 100,000 additional millionaire earners across the country.

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Millionaire flight or fiction?

Debates around such taxes often center on one central contention: millionaire flight.

Critics like Andrey Yushkov, a senior policy analyst at the nonpartisan, nonprofit Tax Foundation, warn that such taxes could trigger “out-migration” and “undermine economic growth.”

Advocates, however, say the data does not support claims of millionaire flight. The Center on Budget and Policy Priorities found that state tax levels “have little effect on whether and where people move.”

Tax return data from the IRS shows that the U.S. gained some 450,000 millionaires from 2013 to 2022, the most recent year of available data. That equates to a 132% increase.

Over that same time period, states that now have active millionaire taxes largely lagged that national average, with the exception of California. However, IRS data does not necessarily reflect the impact of such taxes in states like Massachusetts, where a millionaire tax only went into effect in 2023.

In California, which enacted a 1% tax on income above $1 million in 2005, the number of millionaire earners rose 139% — slightly outpacing the national average — to nearly 129,000.

New York, meanwhile, saw one of the slowest rates of millionaire growth of any state in the country over the last 10 years of data. In 2022, there were just under 70,000 millionaires in the state, up 68% from 2013.

Across New York state, income from $1 million to $5 million is taxed at 9.65%, with marginally higher rates kicking in above $5 million. In New York City, residents earning more than $1 million could be hit with an additional 2% income tax under a proposal from Mayor Zohran Mamdani aimed at closing a budget gap and funding social services, though the plan faces opposition from Gov. Kathy Hochul.

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Talking taxes with clients

Advisors like Dave Jones, director of estate strategy at Bailard in Foster City, California, say that there’s more to where a client lives than taxes alone.

“You never want to let the tax tail wag the dog,” he said. “That’s not the only consideration. It really needs to be something that you really … want to do, to be closer to family, to live in a new place. It’s a big life decision.”

But, he added, high earners also tend to live more mobile lives than lower-income residents, lowering the barrier to a potential move.

“A lot of times, they have homes in different places. They have family in different states, different countries,” Jones said. “And so I think, from an advisor’s perspective, [it’s about] really understanding the client’s options. Where would they want to move? Where do they have family? Where could they establish connections quickly? Or could they start establishing them now, so that a move in the future is relatively easy for them to make? There’s a lot of that kind of preparation that goes into it.”