This year’s State of the Union Address (SOTU) and Federal budget proposal included sweeping proposals that focus on tax reforms impacting high earners, a particularly poignant topic during an election year.
Balancing Fairness and Complexity in Wealth Tax Proposals
Federal and State income and wealth tax laws, bills, and proposals emphasize having everyone pay their ‘fair share’. The aim is to augment revenue streams and most also try not to unfairly burden those with fewer resources.
Several of the Federal tax proposals mentioned in the State of the Union Address are similar to those seen in California, Washington state, and elsewhere. They often include establishing minimum thresholds, additional tax brackets, and increasingly target unrealized capital gains and an individual’s wealth rather than their income alone. This multi-faceted approach poses administrative challenges for the governments, as well as for the constituents that the new tax programs would apply to.
Federal Tax Proposals on the Wealthy
The early March SOTU address included substantial proposed tax program changes for domestic and foreign corporations intended to close tax loopholes and increase U.S. government funding from those entities.
The measures that would affect individual taxpayers are no less daunting:
- Establish a 25% minimum tax rate for those with wealth of more than $100 million (this is referred to as a Billionaire Minimum Tax).
- Restore the top tax rate bracket of 39.6% for those making over $400,000 per year.
- Increase the Medicare tax rate on incomes above $400,000 from 3.8% to 5%.
- Tax the capital gains of households of over $1M at the same rate as their income.
While these proposals may never happen exactly as written, derivatives of them are likely to come before the legislature after much debate, analysis, and scrutiny.
How States and D.C. are Taxing the Wealthy
Oregon
High income earners in Portland, Oregon, in Multnomah County are subject to a Supportive Housing Services personal income tax that positions them as one of the highest taxed groups in the nation. The tax rate and rising housing costs contributed to such an increase in outward migration that that the metroplex changed the peer group used to determine the health of their economy.
Oregon’s top personal income tax bracket is 9.9% and is reached at the $125,000 level for single filers and $250,000 for married filing jointly filers.
High earners in the Portland area have additional taxes to absorb. As part of the Metro district, an additional 1% Metro Supportive Housing Services (SHS) tax is assessed to those meeting the income threshold. Portland’s Multnomah County taxpayers are also subject to the Preschool for All program two-tiered tax that layers an initial 1.5% tax and a second 1.5% tax when the higher threshold is met. It is also important to understand that these taxes are assessed to those that live, work in, or have income derived from the tax jurisdictions regardless of residency.
| Oregon Personal Income Taxes | Tax Rate | Single Filers | Joint Filers |
| Oregon State Top PI Tax Rate | 9.9% | >$125,000 | >$250,000 |
| Metro Supportive Housing Services PI Tax | 1.0% | >$125,000 | >$200,000 |
| Multnomah County Preschool for All PI Tax | 1.5% | >$125,000 | >$200,000 |
| Multnomah County Preschool for All PI Tax | additional 1.5% | >$250,000 | >$400,000 |
California
With its notorious reputation for high taxes, high income earners in California are particularly vulnerable to tax assessments. California’s proposed exit tax remains cause for concern for many individuals and advisors who work in the wealth planning field or may be subjected to its grip or similar legislation that it could spawn.
California’s top personal income tax rate is 13.3% and is met by single filers when they hit the $1 million tax filing bracket. Married filers meet the same fate when they pass the $1,396,542 threshold. The state’s sales tax rate of 7.25% can be augmented by up to an additional 4.75% by local governments. As of July 2023, California also has one of the highest gas tax rates in the U.S. at 77.9 cents per gallon. Together, these and other factors may prompt residents to consider a move elsewhere.
Massachusetts
Following voter approval, a millionaire’s 4% surtax became effective in Massachusetts in 2023. This transitioned their 5% flat tax into two tier brackets, bringing income over $1M taxed at a 9% rate. Different types of income—such as short-term capital gains are taxed differently and similar to the sale of personal residences and form installment sales—they are included within the scope of the 4% additional tax.
The Fair Share Amendment—the formal title of the 4% surtax—was expected to raise over $1.3 billion for Massachusetts from high earners in 2023 alone. Funds have already been utilized to provide free school lunches to all Massachusetts school students, expand financial assistance for public college and university students, and for a plethora of other initiatives. While some high-profile sports stars have stated that the wealth tax contributed to their decision to relocate, the overall number leaving the state permanently is expected to remain small.
New Jersey
Drastically lowering the income threshold for its top tier 10.75% tax rate from $5 million to $1 million was the method New Jersey used to capture additional income from high earning individuals. In 2020, New Jersey had the highest ratio of millionaires per capita in the country, with 9.76% of households holding over one million U.S. dollars in assets.
The TaxFoundation.org State Business Tax Climate Index places New Jersey at its lowest ranking offering reasons for the many challenges to residents and those who are interested in doing business there saying,
“New Jersey…is hampered by some of the highest property tax burdens in the country, has the highest-rate corporate income taxes in the country, and has one of the highest-rate individual income taxes. Additionally, the state has a particularly aggressive treatment of international income, levies an inheritance tax, and maintains some of the nation’s worst-structured individual income taxes.“
Tax Foundation. (2024, April 5). 2024 State Business Tax Climate Index. https://taxfoundation.org/research/all/state/2024-state-business-tax-climate-index/
New York
In 2021, New York state added a supplemental tax for earners with adjusted gross income over $107,650. This ‘recapture tax’ must be calculated individually or with sophisticated tax software as its computation is not as easy as pulling the numbers off a tax table but it roughly translates to a 10.9% rate for earners over $25 million. Additional wealth tax proposals seek to capture more funding for the state and those who reside or work in New York City have city-specific taxes to contend with as well.
As is seen with other states, income tax rates also depend on residency rules and filing status.
Washington D.C.
Washington DC imposes a 10.75% income tax on those with taxable income over $1 million. With its low population and high deficit, discussion continues to look to the wealthy to support their revenue gap.
Challenges of Wealth Taxes
Critics of both individual and corporate tax reform programs note that while the aim may be to reduce the Federal deficit and redistribute wealth, they believe that higher taxes will deter innovation and investment while reducing disposable income. They expect that increased taxes will lead to slower economic growth and reduced job creation.
When substantial tax assessments are in place for a particular population, a degree of migration may be inevitable. States are rightly concerned about outward migration but studies indicate that only a small percent of wealth-tax affected individuals move. The greater concern may be on the impact to businesses supported by the wealthy that expand the effect of movements beyond the individual to the communities at large that are affected when there is fleeing to low or no-income tax states.
Know Your Options: Get Help with Evaluating a Potential Move
Determining the tax consequences of a move is complicated. Income taxes, property taxes, sales taxes, and many other taxes and assessments should be weighed in conjunction with other quantitative and qualitative considerations whenever you consider changing your zip code.
REDW’s State and Local Tax (SALT) experts help you analyze tax implications—regardless of whether you are considering moving across the county, state, or country. We help minimize your tax burden and give you the information you need to make informed decisions.
