Wealth, millionaire tax push spreads to more states — but the trend presents a 'challenge,' expert says

More Democratic states are embracing higher taxes on the wealthy amid increased fiscal pressures. But these policies could cause future revenue issues, experts say. 

"Progressive taxation," or paying higher rates as income rises, isn't new or surprising, said Jared Walczak, a senior fellow at the Tax Foundation, a nonprofit think tank.

In 2023, the average income tax rate was 14.1%, while the top 1% of taxpayers paid 26.3% on average, according to a Tax Foundation analysis of the latest IRS data.

But there's an increasing focus on generating more revenue from the top earners and the highest-net-worth individuals, Walczak said, "and there's fundamentally a challenge with this."

In 2022, Massachusetts voters approved a 4% tax on annual income above $1 million, and Washington in late March enacted a millionaires' tax, which applies a 9.9% levy to residents who make more than $1 million per year. Maine in April also added a surcharge of 2% on yearly earnings above $1 million.

In recent years, there have also been income tax hikes on higher earners in the District of Columbia and states such as Maryland and New York, according to tracking published in February from the Center on Budget and Policy Priorities.

State tax hikes on the wealthy have also been floated in places like California, Rhode Island, Virginia and others.

Last week, New York City Mayor Zohran Mamdani and New York Governor Kathy Hochul proposed a "pied-à-terre tax," which would levy a yearly surcharge on empty second homes in New York City worth more than $5 million.

As momentum builds for higher taxes on top earners in some states, others have aggressively cut income taxes, according to Lucy Dadayan, a principal research associate at the Urban-Brookings Tax Policy Center.

"We are seeing a divergence in state tax policies," she said.

Since 2021, more than 20 states — the majority of those with individual income taxes — have reduced top marginal rates, while a handful of states and the District of Columbia have raised them, according to a February report from the Tax Foundation.

This shows "different fiscal priorities and different approaches to economic growth," Dadayan said.

Recent data suggests support among certain Americans for tax increases on the wealthy.

"We're in a much more populist political environment right now — on the left and the right — and this rhetoric works," said Walczak.

Roughly 60% of U.S. adults said they feel the wealthy of federal income taxes, according to a Pew Research Center survey that polled about 8,500 in late January.

Another survey, from Fox News, found the top concern about federal income taxes was the "wealthy are not paying enough." The company polled 1,000 registered voters in late March.

The Fox News survey found the issue ranked highest among Democratic and independent voters, while Republicans were more concerned by government spending.

Meanwhile, a minority of taxpayers from both parties said they were open to higher taxes on the wealthy to address the federal budget deficit, according to a separate survey from the Bipartisan Policy Center. The nonprofit think tank polled 1,200 taxpayers in late March. 

While many Americans support higher taxes on the ultrarich, federal proposals have failed to gain traction. 

Tax hikes on the wealthy aren't likely to happen amid Republican control of Congress and the White House, policy experts say. But several Democratic lawmakers have floated new proposals to raise taxes ahead of the midterm elections.

Some policy analysts have criticized these ideas and have said these changes may not provide a stable revenue source for states enacting the tax hikes.

"We are talking about a small number of individuals with very volatile income" because the highest earners have business and capital gains income versus wages, Walczak said.

"We've had some incredibly strong years of returns in the market," he said. "But that's not always the case." 

Adam Michel, director of tax policy studies at the Cato Institute, a libertarian think tank, has also said wealth taxes raise less revenue than expected.

"Investors have a strong incentive to shift portfolios toward assets that are harder to value, easier to shelter, or more mobile across borders, rather than toward their most productive use," he wrote in a Substack post in January. "This encourages tax avoidance rather than genuine economic activity."