The Rising Millionaire Tax: Who’s Paying and How It’s Rescuing State Budgets

A quiet but consequential shift has been unfolding in statehouses from Boston to Olympia: lawmakers have discovered that a small slice of ultra-high earners can plug yawning budget holes faster than any sales tax hike ever could. In Massachusetts, voters approved a 4% surtax on income over $1 million in 2022. One year later, the state booked nearly $1.8 billion—almost double what budget forecasters predicted. Teachers got raises. Transit agencies dodged layoffs. And a political line once thought radioactive suddenly looked like a lifeline.

That result explains why the “millionaire tax” has moved from the fringes of progressive wish lists into the center of fiscal strategy. The question now isn’t whether states will try it. It’s who ends up paying, what the money actually does, and whether the political backlash will derail the experiment before it reshapes state budgets for good.

What Counts as a “Millionaire Tax” — and Where It’s Spreading

The phrase sounds simple. The reality isn’t.

Some states target annual income above $1 million. Others focus on capital gains. A few pile on temporary surcharges during crises, then quietly extend them when the revenue proves too tempting to give up.

Here’s how the most consequential versions work today:

• Massachusetts (2023–present): A 4% surtax on income above $1 million, on top of the state’s flat 5% rate. Approved by voters as the “Fair Share Amendment.” Revenue earmarked for education and transportation.
• Washington State (2022–present): A 7% tax on long-term capital gains above $250,000, excluding real estate and retirement accounts. Despite the name, the state insists it’s an excise tax, not an income tax—crucial in a state without a general income tax.
• New Jersey (2009–present): A top marginal rate of 10.75% on income over $1 million, one of the highest in the country.
• New York (2021–present): A temporary high-earner surcharge enacted after COVID-19, pushing the top state rate to 10.9% on income above $25 million, with New York City residents paying even more on top.

California often gets lumped into this category, but technically it relies on steep progressive brackets rather than a discrete “millionaire tax.” The result still stings: a 13.3% top rate, the highest in the nation.

The common thread isn’t ideology. It’s arithmetic. A tiny fraction of taxpayers account for an outsized share of state income tax revenue. In New York, the top 1% of earners contribute roughly 40% of all state income taxes, according to the Department of Taxation and Finance. When deficits loom, legislators know exactly where the money is.

Who Actually Pays — and Who Doesn’t

The political rhetoric often paints millionaire taxes as levies on hedge fund titans and tech founders. The data tells a more nuanced story.

In Massachusetts, the Department of Revenue reports that fewer than 1% of filers pay the surtax in any given year. Many aren’t billionaires or CEOs. They’re business owners selling a company, partners cashing out of a private equity fund, or longtime homeowners realizing capital gains after decades of appreciation.

That volatility matters. Revenue spikes during boom years and softens fast when markets turn. Washington’s capital gains tax, for example, generated about $900 million in fiscal year 2023, then dipped as tech valuations cooled. States banking on these taxes to fund recurring expenses take on real risk.

Another underappreciated detail: residency rules. Millionaire taxes don’t follow people automatically. They hinge on where income is earned and where taxpayers legally reside. That’s why high earners increasingly invest in:

• Residency tracking tools like TaxBird Day Tracker to document days spent in each state
• Advanced tax software such as TurboTax Live Premium or H&R Block Premium & Business to model surtax exposure before a liquidity event
• Wealth dashboards like Empower Personal Dashboard or Wealthfront to stress-test after-tax returns under different state scenarios

The savviest taxpayers don’t flee overnight. They plan years ahead, especially when a business sale or IPO looms.

The Migration Myth — What the Evidence Really Shows

Opponents warn that millionaire taxes trigger mass exoduses. The image of U-Hauls streaming out of high-tax states has become a staple of cable news. The empirical record tells a cooler story.

A landmark study by Stanford sociologist Cristobal Young, analyzing IRS migration data over multiple decades, found that millionaire migration rates barely budge in response to state tax increases. Roughly 2–3% of millionaires move across state lines in any given year, and taxes explain only a sliver of those decisions.

Post-pandemic data reinforces the point. New York did lose high earners in 2020 and 2021—but the losses tracked COVID disruption and remote work more than tax policy. By 2023, the state’s top income tax filers rebounded faster than expected, cushioning Albany’s budget.

That doesn’t mean taxes never matter. They matter most at the margins:

• Retirees choosing where to age
• Founders deciding where to locate a second home
• Investors timing realizations of large capital gains

But wholesale flight? The numbers don’t support it. Jobs, networks, family ties, and cultural gravity still outweigh a few percentage points on a tax return.

How Millionaire Taxes Are Propping Up State Budgets

This is where the story turns from theory to consequence.

Massachusetts used its first-year surtax haul to pour $1 billion into education and hundreds of millions into long-delayed transit repairs. Washington directed capital gains revenue to early childhood education and school construction. New Jersey leaned on its millionaire tax to stabilize finances after the Great Recession—and never looked back.

The appeal for lawmakers is obvious:

• The revenue arrives fast
• The payer base is small
• The political pain diffuses easily

Sales taxes hit everyone. Property taxes rile homeowners. Cutting services angers voters immediately. A tax that only a sliver pays offers rare fiscal cover.

Yet dependence breeds vulnerability. When markets swing, these revenues swing harder. States that lock in permanent spending commitments without reserves risk painful corrections later. The smartest treasurers already treat millionaire tax revenue as quasi-cyclical, padding rainy-day funds instead of funding recurring obligations.

The Political Fault Lines — and What Comes Next

Millionaire taxes scramble traditional political alliances.

Progressives champion them as tools for equity and investment. Moderate Democrats often accept them as pragmatic budget fixes. Republicans uniformly oppose them—yet in states like Washington, voter-approved measures complicate repeal efforts.

Business groups focus their fire on uncertainty. A surtax enacted as “temporary” and extended quietly undermines long-term planning. Investors hate moving targets more than high rates.

Expect the next battles to hinge on three fronts:

1. Ballot initiatives
   Voters approved the Massachusetts surtax directly. Other states, including California, may test similar routes when legislatures stall.

2. Capital gains focus
   Taxes framed as targeting “windfalls” poll better than broad income hikes. Washington’s model will attract imitators.

3. Earmarking promises
   Education and infrastructure sell. General fund backfills don’t. Future proposals will tie revenues tightly to visible outcomes.

Court challenges will continue, especially in states without explicit income tax authority. Washington’s Supreme Court upheld its capital gains tax in 2023, emboldening reformers nationwide.

Practical Moves for High Earners — and for Everyone Else

For those nearing the threshold, preparation beats panic.

• Model multi-year income scenarios using TurboTax Live Premium before selling assets
• Track physical presence meticulously if residency could shift
• Consult fee-only fiduciary planners using platforms like Facet Wealth for state-specific strategies

For voters and policymakers, the lesson cuts deeper. Millionaire taxes work best when treated as supplements, not silver bullets. They can stabilize budgets, fund overdue investments, and buy political breathing room. They can’t replace structural reform or economic growth.

The experiment is still young. But one thing already feels clear: once states discover a revenue stream that closes deficits without sparking revolt, they rarely let it go. The rising millionaire tax isn’t a passing phase. It’s becoming part of the fiscal architecture—and the fight now is over how responsibly states use the windfall before the next downturn tests their resolve.