High-Tax States and Competitiveness | Wealth Taxes

Federalism has allowed for diversity of taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. policies across the country—some good, some not as much. While several states have had unsound tax codes, the ease of interstate movement has kept the worst systems in check, even inspiring high-tax states to push for reforms in order to compete for businesses and families.

Recently, however, the notion of an “average” state is disappearing: while many states are still prioritizing low, competitive rates, others are choosing to move towards unsound, top-heavy policies, driven by messaging against wealth inequality and budget pressures.

Most of these states are already high-tax jurisdictions. But it is becoming increasingly harder to turn the spigot higher to compensate for the ever-growing cracks in the spending vat.

In California, a structural budget imbalance persists despite recent revenue booms from capital gains and personal income taxes. The Governor’s May 2026 Revision projects balanced in 2026-27 and 2027-28 through heavy use of reserves, borrowing, and continued suspension of statutory deposits to the Budget Stabilization Account. However, the Legislative Analyst’s Office projects ongoing operating deficits averaging $10 billion annually in the next three fiscal years, with the state ill-prepared for a revenue downturn. This follows years of large cumulative gaps addressed through similar one-time measures.
Minnesota has spent more than it has collected in revenue every year since 2024 and is forecast to continue doing so through at least 2029, when it expects to face a deficit of $6 billion for that fiscal year.
New York State’s latest financial plan shows a $7 billion upward revision to its structural budget deficit, with a cumulative three-year budget gap of $34.3 billion, as compared to the January version of its FY 2026 Executive Budget. The gap has worsened due to downward revisions to the economic forecast and projected revenues, plus increases in projected spending. The enacted budget for FY 2025-26 totals $254 billion, a 5.2 percent increase, with one-third coming from federal sources, making it especially exposed to federal cuts.
Rhode Island’s projected funding gap for FY 2026 stands at approximately $300 million—representing more than 5 percent of current state spending—after peaking at nearly $400 million in October 2024, before revenue and expenditure revisions improved the picture somewhat.

Moreover, there is very little political will to increase taxes on the general public in these states since even middle- and lower-income taxpayers lose a sizeable chunk of their income to various taxes (e.g., sales, property, gas).

Higher Income Taxes Worsen Competitive Standing

Unfortunately, instead of reining in spending to tackle deficits, many of these states have chosen to target a small demographic, making their tax codes even less neutral. Proposals broadly have taken the form of higher personal income taxes and/or new surcharges.

Hawaii

In Hawaii, Senate Bill 3125 passed on the final day of the state’s 2026 legislative session (May 9, 2026) and is now awaiting Governor Josh Green’s (D) signature. While the governor wanted a series of future income tax reductions paused to account for a strained budget, the pending legislation actually preserves tax cuts for joint filers earning under $350,000, heads of household under $262,500, and single filers under $175,000. However, joint filers earning over $1 million, heads of household earning over $750,000, and single filers earning over $500,000 will all be taxed under a new 13 percent tax bracket—likely to affect around 3,000 taxpayers.

Illinois

Illinois lawmakers advanced HJRCA 21, a proposed constitutional amendment allowing for a three-percentage point surtaxA surtax is an additional tax levied on top of an already existing business or individual tax and can have a flat or progressive rate structure. Surtaxes are typically enacted to fund a specific program or initiative, whereas revenue from broader-based taxes, like the individual income tax, typically cover a multitude of programs and services. on individual income exceeding $1 million. This would raise the top marginal rate from the current flat 4.95 percent to 7.95 percent (and to 9.45 percent for pass-through entities when combined with the personal property replacement tax). The measure seeks to fund property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. relief and provide more funding to schools but has not received a full House vote yet.

Maine

After initially opposing the measure, Maine Governor Janet Mills (D) this April signed a supplemental budget, LD 2212, which includes a 2 percent point surtax on income over $1 million, raising the top rate to 9.15 percent, and is expected to raise $96 million next fiscal year, targeting approximately 2,600 taxpayers. Maine’s top rate now exceeds that of nearby Massachusetts, which had the seventh-highest top marginal individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source rate in the country in 2026.

Rhode Island

In Rhode Island, the “Fair Share for Rhode Island” package, H 7313, advanced in early 2026, to include a 3 percent surtax on taxable income above approximately $640,000 (raising the top marginal rate to 8.99 percent). Some are considering the measure as a means to help close the budget gap, although the House Finance Committee has not yet released it to be included in the House budget.

Virginia

Virginia legislators advanced several proposals this session that would significantly restructure the state’s individual income tax.

House Bill 979 would introduce two new upper-bracket rates starting January 1, 2027—8 percent on taxable income above $600,000 and 10 percent on income exceeding $1 million. This represents a dramatic departure from Virginia’s current flat, top rate of 5.75 percent, which applies to all income above $17,000, nearly doubling the top marginal rate faced by high earners.

Separately, HB 378 would layer on a 3.8 percent net investment income tax (NIIT) beginning in tax year 2027. Had both measures been enacted simultaneously, Virginia would have claimed the dubious distinction of imposing the highest top marginal state-level tax rate on investment income in the nation—13.8 percent, surpassing even California.

Ultimately, HB 188 (a new 10 percent income tax bracket for earnings over $1 million) and HB 979 (higher tax bracketsA tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat. paired with a larger standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. Taxpayers who take the standard deduction cannot also itemize their deductions; it serves as an alternative. and grocery tax exemptions) were merged into a combined package that pairs the new high-income brackets with an expanded standard deduction and a grocery tax exemptionA tax exemption excludes certain income, revenue, or even taxpayers from tax altogether. For example, nonprofits that fulfill certain requirements are granted tax-exempt status by the Internal Revenue Service (IRS), preventing them from having to pay income tax., carrying the measure forward to the 2027 legislative session. A competing proposal, HB 1074, took a somewhat more measured approach—proposing a 7.75 percent top rate on income above $1 million alongside an expansion of the standard deduction to $10,000 for single filers and $20,000 for married couples, effective in 2026. However, that bill, too, has been pushed to 2027.

Washington

Washington Governor Bob Ferguson (D), in March 2026, signed SB 6346, enacting a new 9.9 percent tax on adjusted gross incomeFor individuals, gross income is the total of all income received from any source before taxes or deductions. It includes wages, salaries, tips, interest, dividends, capital gains, rental income, alimony, pensions, and other forms of income.
For businesses, gross income (or gross profit) is the sum of total receipts or sales minus the cost of goods sold (COGS)—the direct costs of producing goods over $1 million per household (with a $1 million standard deduction, inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spendin-adjusted). This marks the state’s first broad income tax in over 90 years and takes effect in 2028, with revenue directed toward education and childcare (though it faces expected constitutional challenges).

Washington, DC

DC Council members narrowly rejected a capital gains surcharge proposal during the FY2026 budget process. The 2 percent proposed NIIT is still under consideration for the FY2027 budget, which is expected to be in a $1 billion shortfall.

These moves heighten the business unfriendliness of the states. Empirical evidence consistently shows high-income individuals respond through relocation. Internal Revenue Service migration data reveal ongoing net outflows of high-AGI filers from high-tax states to no-income-tax jurisdictions. The departure of even a modest number of high earners can lead to revenue shortfalls exceeding initial projections due to behavioral responses. In New York, the problem is significant enough to compel Governor Hochul to appeal for previous residents to return from Florida and Texas.

Wealth Taxes Are Flawed and Counterproductive

Many states have also proposed new wealth taxes, or a combination of wealth and higher income taxes, to address budget shortcomings.

California

California’s 2026 Billionaire Tax Act, a ballot initiative slated for this November, would impose a one-time 5 percent tax on net worth exceeding $1 billion (targeting roughly 200 individuals as of January 1, 2026) to fund healthcare, education, and food assistance. Experts note that aggressive design features and valuation rules could result in an effective rate far higher than 5 percent for many.

Hawaii

While it seems to have lost steam, Senate Bill 313 in Hawaii would impose a 1 percent tax on individual net worth exceeding $20 million, with credits for wealth taxes paid elsewhere. It passed the Senate Judiciary Committee in 2025, carried over to 2026, and, if enacted, would apply to tax years beginning after December 31, 2029.

Minnesota

Minnesota has proposed HF 4616, an annual 1 percent levy on taxable wealth exceeding $10 million for individuals and trusts (affecting an estimated 5,600 taxpayers). Introduced in March 2026, it would generate around $290 million annually. Though still a small fraction of the state’s projected structural deficits, this would be the first broad state-level wealth tax in the US.

Rhode Island

Rhode Island’s “Fair Share” package includes a companion 1 percent annual tax on worldwide financial assets over $25 million.

Washington

Though multiple wealth taxes (SB 5797, $50 million threshold; HB 1319, $100 million threshold) have been proposed in Washington state, the governor has discarded these proposals in favor of the high earner income tax.

These newly proposed or enacted measures compound existing high burdens and distortions and signal further hostility to mobile capital and talent. Valuation of illiquid assets (e.g., private equity, intellectual property, art, businesses) is subjective and prone to disputes. Liquidity constraints may force sales or borrowing, disrupting markets. Even “one-time” taxes set dangerous precedents for expansion because the deficits faced by most of these states are structural.

These Policies Risk Losing an Already Narrow Tax BaseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates.

International precedents have shown high administrative costs, capital flight, and disappointing net revenue when wealth taxes are imposed. Such taxes penalize saving and investment, the foundations of capital formation, innovation, and wage growth—ultimately slowing economic expansion that benefits all residents. In a federal system with free movement, they accelerate the exodus of both people and productive capital to more tax competitive states, such as Florida and North Carolina.

These worrying trends of unsound tax policies risk a self-reinforcing cycle. By further narrowing the tax base to a small, highly mobile segment, states increase revenue volatility. On top of such measures, high income property-focused surcharges, like New York’s pied-à-terre tax, add complexity and valuation challenges while signaling an unwelcoming environment for wealth.

Federalism thrives when states compete through better policy. Increasingly, states are trying to tax their way out of structural economic and budget challenges, rather than focusing on spending restraint and appropriate base-broadening reforms. Instead of fostering sustainable growth, they heighten outmigration risks and long-term economic underperformance. The ultimate victims are those residents who depend on the public services these taxes aim to fund, as the tax base erodes and opportunities diminish. Sound policy prioritizes competitiveness, simplicity, and neutrality over short-term targeting of a politically convenient few.