Democratic countries seek to increase taxes on the wealthy

A version of this article first appeared in CNBC’s Inside Wealth newsletter with Robert Frank, a weekly guide for the high-net-worth investor and consumer. subscription To receive future issues, directly to your inbox.

A new “blue wave” of tax increases on the wealthy is sweeping through state legislatures, with Virginia, Washington, Rhode Island and others joining California in calls for higher taxes on high earners and billionaires.

With states facing potential cuts in federal aid and Democratic lawmakers emboldened by rising populism and growing economic division, lawmakers and governors in several blue states are preparing a raft of new taxes on the wealthy. Meanwhile, many red states continue to reduce or eliminate income taxes to become more competitive.

“What you’re really seeing is the difference,” said Lucy Dadian, principal researcher and state tax expert at the Urban Institute’s Tax Policy Center. “On the one hand, some states are redoubling their efforts to lower interest rates, rebates, and tax competitiveness. On the other hand, some are turning to targeted additional taxes on high earners as a way to finance fast-growing priorities without broadly raising taxes.”

While tax increases are pushed by left-leaning state lawmakers almost every year, the latest push has added momentum. Inflation has increased economic pressures on middle- and low-income earners, sparking renewed calls for higher taxes on the wealthy to offset rising health care and education costs. Government spending has continued to rise since Covid, resulting in a renewed need for revenue.

Many Democratic leaders are also touting higher taxes on high-income Massachusetts as proof that the wealthy will not flee. In 2022, Massachusetts voters approved the Fair Share Amendment, an additional 4% tax on income over $1 million. The tax generated nearly $3 billion in annual revenue in its second fiscal year – more than double the original estimates. Many Democratic leaders say the revenues show that predictions of mass wealth flight in the face of higher taxes are misleading.

As with the Massachusetts amendment, the recent proposed tax increases target only those with the highest incomes. Jared Walczak, a senior fellow at the Tax Foundation, said the effort to differentiate millionaires and billionaires differs from previous tax increases, which sought higher, progressive marginal rates across a broader population to raise revenue.

“Now the division has become more clear,” Walczak said. “It’s not just that as income rises, people should pay progressively more. It’s an effort to tax only a specific subset of the population.”

California is leading the charge to tax the wealthy. The state’s billionaire tax law, a ballot measure likely to go to voters in November, would impose a one-time 5% tax on California residents’ total net worth of $1 billion or more. It will be the first tax of its kind, because it will tax assets, not wealth. It will also be retroactive, entering into force on January 1, 2026.

While its passage remains uncertain, some billionaires have already moved out of the state. Google co-founder Larry Page moved to Florida in December, spending more than $170 million in Miami’s Coconut Grove neighborhood and moving his family office and several business registrations. David Sachs, the tech billionaire and White House AI and cryptocurrency czar, said he moved to Texas after 30 years in California. He told CNBC that the Golden State’s proposed tax amounts to an “asset seizure” and will likely become permanent once approved.

“It’s not a one-off, it’s the first time,” he added.

Since the proposal is a ballot measure, the billionaire’s tax would bypass the governor and Legislature. California Governor Gavin Newsom opposes the tax, saying it will push the wealthy into states with lower taxes. But in other blue states, tax increases on the wealthy come from the top down.

In Virginia, the election of Governor Abigail Spanberger gave Democrats control of the state’s General Assembly and its governorship. Lawmakers have proposed a new 10% tax bracket for those who earn more than $1 million a year. Currently, all income over $17,000 is taxed at 5.75%. The second proposal would add a state-level net investment income tax, applied to capital gains, dividends and rental income, for adjusted gross income above $500,000.

Meanwhile, Virginia’s neighbors are cutting taxes. Lawmakers in West Virginia are working to phase out the income tax, while North Carolina’s flat tax fell from 4.25% to 3.99% in January. North Carolina aims to lower its income tax rate to 2.49% in the coming years.

Elizabeth Bennett Parker, the Virginia House member who proposed the net investment income tax, said the revenue is needed to help working families better afford health care, education and groceries. She cited Massachusetts as an example of success.

“Other states have recently passed laws to ensure the wealthy pay their fair share and have not seen significant impacts on residents,” she said. “There is momentum across our country to rebalance state tax laws, in the wake of Trump’s extreme tax bill that skewed federal tax laws to favor the wealthiest Americans.”

In Washington state, lawmakers are making a bold bet on a potential tax on millionaires. Washington is one of only nine states that currently does not have state income taxes. Opponents say the income tax would violate the state constitution and current law.

However, in 2022, the state imposes a 7% tax on long-term capital gains over $250,000. The following year, Amazon founder Jeff Bezos, a longtime Seattle resident and one of the world’s richest people, announced he was moving to Miami. Opponents said in 2022 a capital gains tax would open the door to a broader income tax.

Now this prediction has become a reality. Washington state lawmakers are proposing a 9.9% tax on those who earn more than $1 million a year. They hope a state Supreme Court ruling that upheld a capital gains tax will provide a potential legal path for a broader millionaire’s tax.

“It was highly anticipated that as soon as a court ruling allowed a capital gains tax, the dominoes would start falling,” Walczak said.

In Michigan, the proposed “Invest in MI Kids” measure would amend the state constitution to impose a higher rate of 9.25% on those with income exceeding $500,000 for single filers and $1 million for joint filers. Supporters say the new tax would generate $1.7 billion in additional revenue for education.

The new rate would also be on top of municipal taxes, with Detroiters facing a combined rate of 11.65%. Meanwhile, Michigan’s neighbors, Indiana and Ohio, have flat individual income tax rates of 2.95% and 2.75%, respectively.

Rhode Island, which last year imposed the so-called “Taylor Swift tax” on expensive vacation homes, is considering an additional 3% tax on income over $1 million. An estimated 2,300 Rhode Island millionaires would see their tax rate rise from 5.99% to 8.99%, according to an analysis by the state budget office. It is estimated that 5,500 non-resident millionaires with tax liabilities in the state could also be affected.

In New York, newly elected Mayor Zahran Mamdani continues to pressure Gov. Kathy Hochul to raise taxes on the wealthy to close what he says is a $12 billion budget gap and to pay for additional services. He has proposed an additional 2% income tax on millionaires, which would raise the top city and state tax rate for New York City residents to 16.8%. Adding federal taxes, the top rate becomes 53.8%.

While the fate of the tax proposals remains uncertain, experts say the growing chorus of higher taxes in many blue states will make business owners and high-income earners consider moving to lower-tax states.

“The doubling down on high taxes in states like California, Washington and others makes them much less attractive, especially given the number of other options now available to businesses and individuals who want to relocate,” Walczak said. “In California, you always wonder what comes next with taxes. In Texas, that’s not a concern.”