Democratic states seek to hike taxes on the wealthy

A version of this article first appeared in CNBC’s Inside Wealth newsletter with Robert Frank, a weekly guide to the high-net-worth investor and consumer. Sign up to receive future editions, straight to your inbox.

A new “blue wave” of tax hikes on the wealthy is rippling through state legislatures, as Virginia, Washington state, Rhode Island and others join California in calls for higher taxes on top earners and billionaires.

With states facing potential cuts in federal aid and Democrat lawmakers emboldened by rising populism and a growing economic divide, legislators and governors in many blue states are preparing a range of new taxes on the wealthy. At the same time, many red states continue to cut or eliminate income taxes to become more competitive.

“What you’re really seeing is divergence,” said Lucy Dadayan, principal research associate and state tax expert at the Tax Policy Center at the Urban Institute. “On one side, some states are doubling down on rate cuts, rebates, and tax competitiveness. On the other, some are turning to targeted surtaxes on high earners as a way to fund fast-growing priorities without raising broad-based taxes.”

While tax hikes are floated by left-leaning state legislators almost every year, the latest push has added momentum. Inflation has increased the economic pressure on middle- and lower-income earners, sparking renewed calls for higher taxes on the wealthy to offset higher health care and education costs. State spending has continued to rise since Covid, renewing the need for revenue.

Many Democratic leaders are also heralding a tax hike on high earners in Massachusetts as proof that the wealthy won’t flee. In 2022, Massachusetts voters approved “The Fair Share Amendment,” a 4% surtax on income over $1 million. The tax generated nearly $3 billion in annual revenue in its second fiscal year – more than twice the original estimates. Many Democratic leaders say the revenue shows that predictions of mass wealth flight in the face of higher taxes are misleading.

Like the Massachusetts amendment, the latest proposed tax increases only target top earners. Jared Walczak, senior fellow at the Tax Foundation, said efforts to single out millionaires and billionaires differ from previous tax hikes, which sought higher, progressive marginal rates on a broader population to raise revenue.

“Now it’s a starker divide,” Walczak said. “It’s not just that as incomes rise people should pay progressively more. It’s an effort to only have taxes on a specific subset of the population.”

California is leading the charge to tax the wealthy. The state’s Billionaire Tax Act, a ballot measure likely to head to voters in November, would impose a one-time 5% tax on the total net worth of California residents worth $1 billion or more. The tax would be the first of its kind, since it would tax assets rather than wealth. It would also be retroactive, taking effect Jan. 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, dropping more than $170 million in Miami’s Coconut Grove neighborhood and moving his family office and several business registrations. David Sacks, the tech billionaire and AI and crypto czar for the White House, said he moved to Texas after 30 years in California. He told CNBC the proposed Golden State tax amounts to “an asset seizure” and would likely become permanent once approved.

“It’s not one-time, it’s a first time,” he said.

Since the proposal is a ballot measure, the billionaire tax would bypass the governor and legislature. California Gov. Gavin Newsom opposes the tax, saying it would drive the wealthy to lower-tax states. In other blue states, however, tax hikes on the wealthy are coming from the top down.

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

Virginia’s neighbors, meanwhile, are cutting taxes. West Virginia lawmakers are in the process of phasing out their income tax, while North Carolina’s flat tax fell from 4.25% to 3.99% in January. North Carolina aims to bring down its income tax rate to 2.49% in the coming years.

Elizabeth Bennett-Parker, a member of the Virginia House of Delegates who’s proposed the net investment income tax, said the revenue is needed to help working families better afford health care, education and groceries….