State Wealth Tax Innovations: Tips for High-Net-Worth Clients

As federal tax reform unfolds under the new administration, some states are debating new approaches to the taxation of high-net-worth individuals. Tax advisors need to understand that state lawmakers are pursuing taxes on high-income earners on a variety of policy fronts and for a variety of reasons. All of which should inspire advisors to prepare creatively and cautiously for this new environment.

The Rise of State-Level Millionaire Taxes

Following the recent enactment of new personal income tax rates and brackets in states like California, Massachusetts and New Jersey, other states are developing innovative approaches to taxing wealth. Lawmakers, particularly on the Democratic side of the aisle, believe that these targeted taxes (often dubbed “millionaire taxes”) on high earners generate significant revenue while minimizing broader economic impact.

States implementing these targeted tax approaches typically cite economic efficiency, revenue stability and a drive to reduce income inequality as their key political motivations. Lawmakers design these millionaire tax proposals to fall primarily, if not exclusively, on the highest rungs of the income distribution in order to avoid raising general tax rates across the board.

Success Stories Driving Expansion

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Massachusetts provides a compelling case study. On Election Day 2022, Bay State voters approved Question 1, a millionaire tax aimed at bolstering revenue for education and transportation projects. Since its enactment, it has generated $1.8 billion—approximately 3% of the state budget—exceeding initial projections. State lawmakers have allocated these funds for long-sought-after programs such as free public-school meals for every child in the state.

This success has encouraged other states to explore similar approaches, though implementation varies significantly. New York’s top income tax bracket reaches 10.9% for taxpayers with incomes exceeding $25 million, while those earning between $1 million and $25 million face rates between 9.65% and 10.3%. New York City residents can see combined rates reaching 14.2%.

New Jersey’s approach targets those with incomes exceeding $1 million with a 10.75% rate while also implementing a 1% “mansion tax” on real estate sales exceeding $1 million.

Millionaire Taxes Aren’t Just for Millionaires

Some states are implementing PIT bracket changes targeting much lower income thresholds. Minnesota’s top rate of 9.85% applies to single filers with taxable income exceeding $198,631 (or $165,206 for married filing separately). Oregon’s maximum rate of 9.9% applies to single filers with taxable income above $125,000.

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These broader approaches raise essential planning considerations for clients who may not consider themselves high-net-worth individuals but face the highest levels of state income tax burdens.

Emerging Trends: Taxing Net Worth

The most novel development may be attempts to tax overall net worth rather than income. Following on debates from previous legislative sessions, this year Hawaii legislators proposed a 1% tax on assets exceeding $20 million (HB 1235/SB 313), potentially taking effect in 2030. While these bills have seen some success in committee hearings, they have not yet come close to final passage. Similarly, California and Washington have introduced their wealth tax bills, but they have also failed to gain sufficient political traction.

These net-worth taxes represent a fundamental shift in taxation philosophy and would require entirely new wealth planning and protection approaches. It is far from certain if they will ever pass political, legal, or administrative muster, but for now, this idea does not seem to be going away, and tax planners should begin thinking about the impact taxes like these might have.

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The Strategic Impact on Tax Planning

The proliferation of state taxes on upper-income earners creates several considerations for advisors:

Political Crowding Effects: Implementing millionaire taxes can politically crowd out other revenue-raising proposals. In Massachusetts, there have been no serious efforts to raise or impose new taxes since the millionaire tax was passed, as it has reduced the political appetite and fiscal need for additional tax revenue.

Residency Planning: There is perennial debate about whether higher individual taxation leads to outmigration to states with lower PIT burdens. Individual clients, particularly those with significant flexibility regarding their domicile, may still benefit from strategic residency planning.

Charitable Strategies: Several states are considering caps on charitable deductions, potentially affecting philanthropic planning for high-net-worth individuals.

Asset Location: With potential taxes on real estate and investment assets, strategic decisions about where to hold various asset classes are becoming increasingly important.

Looking Ahead

The proliferation of state wealth taxes is likely to continue, especially if federal policy changes reduce state funding. Wealth management professionals should monitor these developments closely, as they may significantly impact clients’ long-term financial strategies.

Several states are actively considering new proposals, including Illinois, where voters recently approved a non-binding referendum that could enable a millionaire tax by changing the state’s income tax structure from flat to progressive (though voters rejected a similar proposal in 2020).

As the tax landscape evolves, high-net-worth clients will increasingly need sophisticated counsel to navigate these complex and sometimes conflicting state requirements while optimizing their overall tax position.