Several high-tax U.S. states are considering or enacting new taxes on high earners and wealth as they face structural budget gaps. The proposals include higher top income tax brackets, surtaxes, capital gains taxes, and wealth taxes, but the source argues that these measures may worsen competitiveness, increase migration risk, and make revenue more volatile.
Budget Pressures in High-Tax States
Several states already considered high-tax jurisdictions are facing ongoing fiscal stress.
- California continues to face a structural budget imbalance despite recent revenue booms from capital gains and personal income taxes. The Governor’s May 2026 Revision projects balance in 2026-27 and 2027-28 through reserves, borrowing, and continued suspension of statutory deposits to the Budget Stabilization Account. The Legislative Analyst’s Office projects operating deficits averaging $10 billion annually over the next three fiscal years.
- Minnesota has spent more than it collected in revenue every year since 2024 and is forecast to continue doing so through at least 2029, when it expects a $6 billion deficit.
- New York State’s latest financial plan shows a $7 billion upward revision to its structural deficit and a cumulative three-year budget gap of $34.3 billion through state fiscal year 2029. Its FY 2025-26 enacted budget totals $254 billion, a 5.2% increase, with one-third funded by federal sources.
- Rhode Island has a projected FY 2026 funding gap of about $300 million, more than 5% of current state spending. The gap had peaked near $400 million in October 2024 before revenue and expenditure revisions improved the outlook.
The source notes that there is limited political appetite in these states to broadly raise taxes on the general public, since middle- and lower-income taxpayers already pay sales, property, gas, and other taxes.
High-Income Tax Proposals
A number of states have moved toward higher personal income taxes or new surtaxes aimed at high earners.
Hawaii
Hawaii’s Senate Bill 3125 passed on the final day of the 2026 legislative session, May 9, 2026, and was awaiting Governor Josh Green’s signature.
The legislation preserves future income tax reductions for:
- Joint filers earning under $350,000
- Heads of household earning under $262,500
- Single filers earning under $175,000
It adds a new 13% tax bracket for:
- Joint filers earning over $1 million
- Heads of household earning over $750,000
- Single filers earning over $500,000
The source estimates the new bracket would affect around 3,000 taxpayers.
Illinois
Illinois lawmakers advanced HJRCA 21, a proposed constitutional amendment allowing a three-percentage-point surtax on individual income above $1 million.
The proposal would raise the top marginal rate from the current flat 4.95% to 7.95%. For pass-through entities, the combined rate would reach 9.45% when including the personal property replacement tax.
The measure is intended to fund property tax relief and provide more funding to schools, but it had not received a full House vote.
Maine
Maine Governor Janet Mills signed supplemental budget LD 2212 in April after initially opposing the measure.
The budget includes a 2-percentage-point surtax on income over $1 million, raising the top rate to 9.15%. It is expected to raise $96 million in the next fiscal year and target about 2,600 taxpayers.
Maine’s top rate now exceeds that of nearby Massachusetts.
Rhode Island
Rhode Island’s “Fair Share for Rhode Island” package, H 7313, advanced in early 2026.
It includes a 3% surtax on taxable income above about $640,000, raising the top marginal rate to 8.99%.
The measure has been discussed as a way to help close the state budget gap, but the House Finance Committee had not released it for inclusion in the House budget.
Virginia
Virginia lawmakers advanced several proposals that would significantly restructure the state income tax.
House Bill 979 would introduce two new upper-bracket rates from January 1, 2027:
- 8% on taxable income above $600,000
- 10% on taxable income above $1 million
Virginia’s current top rate is 5.75%, applied to income above $17,000.
A separate measure, HB 378, would add a 3.8% net investment income tax beginning in tax year 2027. If enacted together with the higher income tax brackets, Virginia would impose a 13.8% top state-level tax rate on investment income.
Ultimately, HB 188, which proposed a new 10% bracket on income above $1 million, and HB 979 were merged into a combined package pairing high-income brackets with an expanded standard deduction and a grocery tax exemption. The measure was carried forward to the 2027 legislative session.
A competing proposal, HB 1074, would create a 7.75% top rate on income above $1 million and expand the standard deduction to $10,000 for single filers and $20,000 for married couples. It was also pushed to 2027.
Washington
Washington Governor Bob Ferguson signed SB 6346 in March 2026.
The law creates a new 9.9% tax on adjusted gross income above $1 million per household, with a $1 million inflation-adjusted standard deduction.
The tax takes effect in 2028 and directs revenue toward education and childcare. It is expected to face constitutional challenges.
The source notes that this is Washington’s first broad income tax in more than 90 years.
Washington, DC
The DC Council narrowly rejected a capital gains surcharge during the FY2026 budget process.
A proposed 2% net investment income tax remains under consideration for the FY2027 budget, which is expected to face a $1 billion shortfall.
Migration and Tax Base Risks
The source argues that higher taxes on high-income individuals can worsen state competitiveness because high earners are mobile.
It cites Internal Revenue Service migration data showing net outflows of high-adjusted-gross-income filers from high-tax states to no-income-tax jurisdictions.
The source says that even modest departures among high earners can lead to revenue shortfalls beyond initial projections because the tax base becomes narrower and more volatile.
New York is cited as an example, where Governor Kathy Hochul has appealed for former residents to return from Florida and Texas.
Wealth Tax Proposals
Several states have also proposed wealth taxes, either alone or alongside higher income taxes.
California
California’s 2026 Billionaire Tax Act, a ballot initiative scheduled for November 2026, would impose a one-time 5% tax on net worth above $1 billion.
The measure would target roughly 200 individuals as of January 1, 2026, and fund healthcare, education, and food assistance.
The source notes that valuation rules and aggressive design features could cause the effective rate to exceed 5% for some taxpayers.
Hawaii
Hawaii’s Senate Bill 313 would impose a 1% tax on individual net worth above $20 million, with credits for wealth taxes paid elsewhere.
The measure passed the Senate Judiciary Committee in 2025, carried over to 2026, and would apply to tax years beginning after December 31, 2029 if enacted.
The source states that the proposal appears to have lost momentum.
Minnesota
Minnesota’s HF 4616, introduced in March 2026, would create an annual 1% tax on taxable wealth above $10 million for individuals and trusts.
The proposal would affect an estimated 5,600 taxpayers and generate about $290 million annually.
The source notes that this would be the first broad state-level wealth tax in the United States, but still only a small fraction of Minnesota’s projected structural deficits.
Rhode Island
Rhode Island’s “Fair Share” package includes a companion 1% annual tax on worldwide financial assets above $25 million.
Washington
Washington has seen multiple wealth tax proposals, including:
- SB 5797, with a $50 million threshold
- HB 1319, with a $100 million threshold
The governor has moved away from those wealth tax proposals in favor of the high-earner income tax.
Administrative and Economic Concerns
The source argues that wealth taxes are difficult to administer and can create economic distortions.
The main concerns include:
- Difficulty valuing illiquid assets such as private equity, intellectual property, art, and businesses
- Subjective valuations and disputes
- Liquidity problems that may force asset sales or borrowing
- Risk that one-time taxes create precedents for future expansion
- Greater incentive for high-net-worth individuals and capital to move to more tax-competitive states
The source also points to international precedents, arguing that wealth taxes have produced high administrative costs, capital flight, and disappointing net revenue.
Policy Trade-Off
The source frames these tax proposals as a response to structural budget gaps, but argues that targeting a small group of high earners may increase long-term fiscal risk.
The core concern is that states relying more heavily on a narrow, highly mobile tax base may face:
- More volatile revenues
- Greater outmigration risk
- Reduced competitiveness
- Greater complexity in the tax code
- Long-term economic underperformance
The source contrasts these approaches with policies focused on competitiveness, simplicity, neutrality, spending restraint, and broader-based reforms.
Source article: taxfoundation.org
