Millionaire Taxes Are Back -- With a Vengeance

Find out where the rich already take a big tax hit -- and which states are looking at them now.

Dan Caplinger
Dan Caplinger
Mar 10, 2019 at 10:24AM
Investment Planning

The 2018 midterm elections brought a wave of new discussion about the tax system, and policymakers are increasingly looking at measured aimed at making the tax system more progressive. Even at the federal level, several prominent lawmakers have proposed raising taxes on high-income taxpayers, with the call from Rep. Alexandria Ocasio-Cortez (D-N.Y.) to impose a 70% marginal tax rate on those with incomes above $10 million getting the most attention.

As long as Congress remains divided in terms of party control, changes to taxes at the federal level are highly unlikely. However, many states have imposed so-called millionaire taxes on their highest-income residents, and some others are now taking a fresh look at adding their own versions of these higher tax rates for their wealthiest taxpayers.

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Where millionaire taxes are already in place

Several states already have tax brackets that take effect for millionaires that are higher than what lower-income taxpayers have to pay. They include the following:

  • California residents pay an extra percentage point on income above $1 million. That boosts the already high 12.3% top bracket to 13.3% for single taxpayers earning $1 million or more or joint filers with incomes above roughly $1.145 million.
  • Connecticut's top tax bracket of 6.99% takes effect for joint filers with incomes of $1 million. Singles pay the higher tax with an income threshold of just half a million dollars.
  • In New York, a threshold of $1,077,500 for singles and $2,155,350 for joint filers applies to the top rate tax, which in 2019 is 8.82%.
  • Finally, an 8.95% tax rate applies to taxpayers in Washington, D.C. if they have incomes above $1 million -- regardless of filing status.

Not all of these taxes are particularly punitive. Connecticut and D.C. add only small fractions of a percent to their tax rates on millionaires. However, New York's millionaire tax amounts to a two percentage point hike compared to the next-lower tax bracket, double California's single percentage point boost.

Where could new millionaire taxes pop up?

Millionaire taxes are getting a lot of attention, and many policymakers in other states want to add them. New Jersey Gov. Phil Murphy (D-N.J.) has once again called for the addition of a new 10.75% tax bracket on those making more than $1 million, above the current maximum rate of 8.97%, but past attempts have met with resistance. Similarly, after a failed attempt to get a constitutional amendment proposal on the ballot in Massachusetts asking for voters to approve a millionaire tax, the measure is once again under consideration from state lawmakers.

Even some places where a tax increase seems out of sync with local politics have seen consideration of boosting rates on high-income taxpayers. In Arizona, voters were poised to decide whether to create two new brackets, the highest of which would've more than doubled the top income tax rate on joint filers with more than $1 million in income. Yet the state's supreme court ruled that the measure's signature-gathering process hadn't complied completely with requirements, taking it off the battle.

New York faces a potential move in the other direction. Under current law, the New York millionaire tax would go away in 2020, and many are pleased that the temporary tax might be allowed to disappear. Yet some have called for a reinstatement or even expansion of the millionaire tax, possibly creating additional brackets for multimillionaires at various income levels.

Expect more political wrangling

One obstacle to higher state income taxes is the fact that federal law no longer allows for an unlimited deduction of state and local taxes. Millionaires have been among those hardest hit by the new $10,000 annual limitation on those taxes, and hiking them could spur further flight from rich residents to tax-friendlier states.

With more calls to try to fix income and wealth inequality, though, millionaire taxes at the state level are likely to get more attention. Washington's gridlock might make federal tax changes unlikely, but states could easily see shifts in how they tax their wealthier residents going forward.