By Abby Schultz
U.S. states are heading in different directions on tax policy, reflecting diverging views of wealth and economic growth.
California has grabbed headlines with a proposed ballot initiative (that is still gathering signatures) for a one-time, 5% tax on the net worth of billionaires. On March 11, Washington state passed a "millionaires' tax" on personal income above $1 million and expanded a tax credit for low-income working families.
Maine, Connecticut, and Rhode Island are among several other states where proposals exist to boost taxes on their wealthiest residents. New York City Mayor Zohran Mamdani has also stirred debate with a proposed two percentage point increase in the city's income tax for those who make more than $1 million a year.
At the same time, South Carolina, Georgia, and Missouri are seeking to cut personal income taxes, a year after Oklahoma and Mississippi created a plan to eliminate personal income taxes altogether, to spur economic growth and attract businesses to their states.
That some states governed largely by Republicans are cutting taxes to spur growth while those governed largely by Democrats are raising them to pay for public services, is a century-old trend, Matt Gardner, senior fellow at the nonpartisan Institute on Taxation and Economic Policy, or ITEP, said in an interview.
The trend gained steam in the aftermath of the pandemic as several states, governed by both parties, became flush with revenue from a combination of federal fiscal stimulus, high inflation, and wage growth. The extra cash prompted many to cut personal income taxes in one way or another.
What's new today is that the tax and spending choices made by the federal government, including the 2025 tax law and tariffs on imported goods, "are making life difficult for both red and blue states," Gardner says.
The federal tax law passed last year may mean less money is being channeled to states for Medicaid and other public services, but it also means the wealthiest 1% in the U.S. are receiving tax cuts totaling $1 trillion over the next decade, according to ITEP research.
"The Trump administration's actions over the last year are a big part of what's making these revenue raising plans necessary at the state level, but they're also providing important cover to state lawmakers who want to do it in a progressive way," Gardner says.
In his view, the states that are instead "choosing to reduce or even eliminate income taxes" are making choices that aren't sustainable."
"When state residents figure out that they can't have the things they want anymore -- adequately funded schools or healthcare systems or transportation funding -- many of these decisions are likely to be reversed," Gardner says.
These different approaches are happening when the gap between the richest and poorest in the U.S. has widened to a historic high. The top 1% in the U.S. held nearly 32% of all wealth in the country as of the third quarter last year compared with only 2.5% held by the bottom 50%, according to the latest Federal Reserve data.
Jared Walczak, senior fellow at the nonpartisan Tax Foundation, said in an interview that "all policy involves trade-offs between economic growth and revenue generation." But, "a growing economy benefits the entire population."
Lower taxes and other policies have allowed the economies of states such as Georgia, Tennessee, Arizona and Nevada "to grow in ways that benefit residents broadly, reducing costs for those who need it, and reducing the number who need those benefits," Walczak argues.
Groups such as the Tax Foundation and ITEP have opposing views on tax policy. ITEP finds most state and local tax systems are regressive, meaning lower-income individuals and families pay more in taxes as a percentage of their income than higher-income households. The organization publishes Who Pays, a regularly updated analysis of all 50 states and Washington, D.C., showing who wins and who loses from changes in tax laws.
The Tax Foundation, instead, tracks "state tax competitiveness" in an index published each year. Last year's index ranked Wyoming, South Dakota, New Hampshire, and Alaska, among the top 10 "best states," all of which don't have either a corporate income tax, or an individual income tax, or a sales tax, or some combination of all three.
The U.S. tax and transfer system -- referring to government payments made to low-income taxpayers -- is "highly progressive," and although states generally have more regressive tax systems, they have more generous distribution programs, Walczak says. For each dollar of taxes paid by the bottom quintile of taxpayers they received $6.17 in gross government transfers, compared with 11 cents received by the top quintile, the Tax Foundation found in a 2023 report.
Among one of the "worst" states on the Tax Foundation's list is Massachusetts, ranked No. 43, which enacted a 4% surtax on income that exceeds $1 million in 2022. The tax was expected to generate between $1 billion and $2 billion annually, but has raised more, reaching nearly $3 billion last year, according to the Massachusetts Department of Revenue.
Though the millionaire tax raised more than expected on the back of a strong economy and stock markets, the state's regular income tax collections have underperformed, Evan Horowitz, executive director of Tufts University's Center for State Policy Analysis.
One reason? "When people hide money from the millionaire tax, it's hidden from the regular tax," Horowitz says. Although he's still analyzing exactly how much, he estimates tax strategies by wealthy residents could have cost state coffers roughly $800 million last year. Yet, even in a state where Democrats have a super majority, political blowback from more centrist lawmakers led to a series of tax cuts within a year, and more are being considered, Horowitz says.
What didn't happen is millionaire flight from the state, which naysayers predicted, he says. "People like where they are living." Citing data from the Internal Revenue Service, Bloomberg reported on Friday that 70% of income taken out of the state in 2023 was by high-income taxpayers who moved. However, the story also noted that such outflows were taking place before the tax went into effect and the number of higher-income earners leaving fell year-over-year.
Washington state is already expected to face repercussions from its millionaire tax in the form of a legal challenge. The new 9.9% personal income tax applies to income above $1 million per household, so the income of married couples or registered domestic partners is combined whether they file jointly or not. Walczak calls it a "marriage penalty."
The tax is on top of Washington's already aggressive taxes on businesses, including a tax on total revenue, or gross receipts, versus net income, he adds. This new tax "undermines the tax competitiveness in Washington when there is increasing divergence between states," Walczak says. "Businesses and individuals are more mobile than they used to be, and they have more choices than ever before with a growing number of states offering highly competitive tax codes."
ITEP, however, has named Washington among its most regressive states, where 20% of the population with the lowest incomes "pay three times as much of their income in taxes as the wealthiest 1%."
This new millionaire tax "is hardly a sea-level change in the structure of the Washington tax -- all it's doing is making Washington's tax system closer to what other states do," Gardner says.
"Nobody is enacting these taxes because they don't like rich people," he adds. "They're enacting these taxes because they recognize you can't base a sustainable tax system on property taxes and consumption taxes, which is what Washington has been doing for a hundred years."
Write to Abby Schultz at abby.schultz@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
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March 21, 2026 03:00 ET (07:00 GMT)
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