Updated – More States Aim to Increase Taxes on Millionaires by Karen A. Lake, CPA
Posted on January 05, 2021
In 2020 New Jersey became the fourth state in the U.S. to raise taxes on some of its wealthiest residents. Under the law, the state’s top marginal tax rate of 10.75 percent will apply to annual earnings of $1 million or more effective for tax years starting on Jan. 1, 2020. Previously, taxpayers with annual gross income of between $1 million and $5 million were subject to a top rate of 8.97 percent, and the higher 10.75 percent rate did not kick in until earnings reached $5 million.
As states across the nation struggle with budget shortfalls in the wake of the COVID-19 health crisis, many are considering similar tax hikes on their high-net-worth residents. What does this mean for individuals and business taxpayers in those states?
The State of Millionaire Taxes in the U.S.
New Jersey’s millionaire tax is the second highest in the nation behind California, which currently imposes a top marginal tax rate of 13.3 percent on individual taxpayers with annual earnings of $1 million or more ($1.145 million for married couples filing joint tax returns). Other states with millionaire taxes already in place include Washington, D.C., with an 8.75 percent tax rate on individuals with annual income above $1 million, followed by New York with a top tax rate of 8.82 percent on individuals earning $1,077,550 or more. In Connecticut, the top tax bracket of 6.99 percent kicks in when married couples filing joint tax returns reach the $1 million income threshold.
With New Jersey’s slow but ultimate success at increasing taxes on its top-earning residents, other states are following suit.
- In New York, lawmakers continue to debate a tax rate as high as 12 percent on personal annual income exceeding $100 million as well as special tax on the unrealized capital gains of the state’s billionaire taxpayers. High-net-worth tax residents of New York City already pay a top rate of 12.6 percent.
- A bill in California proposes a series of surcharges on high-income earners that could bring the top tax rate in the state to almost 17 percent, or 54 percent when combined with federal income taxes.
- The Massachusetts legislature will vote on a tax bill calling for an additional tax of 4 percent on the portion of an individual taxpayer’s personal income that exceeds $1 million beginning in tax year 2023.
In addition, taxpayers in nine states will be voting on a variety of tax-related ballot measures in the upcoming general election. This includes the following:
- Illinois voters will decide whether to grant the legislature the power to change the state’s personal income tax system from a flat tax rate of 4.95 percent to a graduated tax with a top rate of 7.99 percent on annual income of $750,000, or $1 million for married couples filing joint returns.
- Arizona’s ballot measure, if approved, would establish a new, top individual income tax rate of 8 percent (from 4.5 percent) on personal income above $250,000, or $500,000 for married taxpayers filing joint returns.
- By contrast, Colorado’s Proposition 116 calls for a retroactive income tax rate reduction from 4.63 percent to 4.55 percent.
Tax hikes on top earners is nothing new. Several states raised taxes on their wealthiest residents during and even after the most recent recession, and the issue has played out on the national level during this year’s Presidential election. However, such activity highlights the challenges of tax competition across state borders and the risks and rewards governments must consider before raising taxes to fill budget gaps.
Traditional thinking has held that a tax on millionaires will strip significant revenue from a state’s tax base by pushing wealthy residents (with the ability to pay higher taxes) to move their families and businesses to more tax-friendly jurisdictions. While it is true that millions of people move each year to states with lower tax rates or no personal income tax, such as Florida, Nevada or Tennessee, a 2014 study conducted by Stanford University found little evidence to support claims that wealthy taxpayers permanently relocated to another state due to modest tax increases of as much as 3 percent in their home states. Moreover, a report issued this year by the Institute on Taxation Economic Policy (ITEP) found that during the first year of the Tax Cuts and Jobs Act, which capped the federal tax deduction for state and local tax at $10,000, New York and California added the most new millionaires to their tax base.
Because high earners are often too embedded in their home states to simply pack up and leave, some will acquire second or third homes in low or no tax states and attempt to establish permanent legal residence (domicile) there. For example, a New Jersey resident hoping to establish domicile in Florida for income-tax purposes must meet a series of benchmarks to demonstrate intent and proof of residency, including, but not limited to, getting a Florida driver’s license, registering to vote in the state and spending the required minimum 183-days there.
By contrast, families planning a move to another state may consider local taxes in their decision-making process, but the ultimate choice should be dependent on where the family can live its best life and achieve their needs and goals. In all matters involving personal and business finances, taxpayers should consult with their professional CPAs and advisors to ensure that they implement strategies that comply with federal and state regulations while ensuring tax efficiencies across state borders.
About the Author: Karen A. Lake, CPA, is a state and local tax (SALT) specialist and an director of Tax Services with Berkowitz Pollack Brant Advisors + CPAs, where she helps individuals and businesses navigate complex federal, state and local tax laws, and credits and incentives. She can be reached at the firm’s Miami office at (305) 379-7000 or firstname.lastname@example.org.