If your state is debating a new tax on millionaires, you may assume it only matters to the people writing seven-figure checks to the IRS each April. You would be wrong, and the reason has less to do with politics than with a structural problem that one prominent tax expert says state lawmakers are choosing to ignore.
A growing number of Democratic-led legislatures are betting their budgets on a narrow slice of high earners whose income swings wildly from year to year, creating a revenue stream that could leave your state’s schools, healthcare programs, and infrastructure funding exposed to market downturns.
Three states have enacted millionaire taxes, and more are coming fast
Washington state enacted a 9.9% levy on household income above $1 million in late March, Massachusetts has been collecting a 4% surtax on millionaire income since 2023, and Maine added a 2% surcharge on earnings above $1 million in April 2026, CNBC reported.
California, Rhode Island, Virginia, and several other states have proposals in various stages of debate. New York City Mayor Zohran Mamdani has pushed for a a two-point income tax hike on millionaire earners, which would bring the top combined city and state rate for New York City residents to 16.8%.
“We’re in a much more populist political environment right now, on the left and the right, and this rhetoric works.” said Jared Walczak, Senior Fellow, Tax Foundation.
Rhode Island’s proposal would raise its top rate from 5.99% to 8.99% for an estimated 2,300 millionaires in the state. The momentum is real; legislative votes are underway, and your state may be next.
The Tax Foundation warns that this revenue model has a fundamental flaw
Jared Walczak, a senior fellow at the Tax Foundation, told CNBC the growing focus on generating revenue from the highest earners presents what he called a fundamental challenge for state budgets.
“We are talking about a small number of individuals with very volatile income,” Walczak said, because the highest earners derive their income from capital gains and business profits rather than predictable wages. That distinction matters more than most readers realize.
When markets are up, millionaire income surges and state coffers overflow. When markets drop, that revenue evaporates, and the programs your state funds with it do not shrink to match.
Walczak also drew a distinction between traditional progressive taxation and what is happening now. “It’s not just that as incomes rise people should pay progressively more,” he said. “It’s an effort to only have taxes on a specific subset of the population.”
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The top 1% of taxpayers paid 38.4% of all federal income taxes in 2023 while earning 20.6% of total adjusted gross income, the Tax Foundation’s analysis of the latest IRS data showed. The average income tax rate across all filers was 14.1%, while the top 1% paid 26.3%.
Those numbers already reflect significant progressivity at the federal level, and the new state-level surcharges add to that. For a New York City millionaire under Mamdani’s proposal, the combined federal, state, and city rate would reach 53.8%.
Walczak’s concern is not that millionaires cannot afford it. His concern is that states are building permanent spending obligations on a revenue base that could contract sharply in any given year.
Massachusetts collected $6 billion, but does that prove the model works
Supporters of millionaire taxes point to Massachusetts as proof that the approach works. The state has collected nearly $6 billion in additional tax revenue since its 4% surtax took effect in 2023, and the number of millionaires in the state has grown, not shrunk, according to the Center on Budget and Policy Priorities.
That record has emboldened other state legislatures to move forward with their own versions. But Massachusetts enacted its surtax during a period of strong stock market performance and rising asset values, which inflated millionaire incomes across the board.
The test of whether millionaire taxes deliver stable, reliable funding will come during the next market downturn, when capital gains income contracts and business profits decline. States that have already committed that revenue to expanded healthcare, education, or infrastructure programs will face difficult choices.
The red-blue tax divide is widening across the country
More than 20 states have reduced their top marginal income tax rates since 2021, creating a sharp policy divergence between states that raise taxes on the wealthy and those that cut them. “We are seeing a divergence in state tax policies,” Lucy Dadayan, a principal research associate at the Urban-Brookings Tax Policy Center, told CNBC.
She said some states are doubling down on rate cuts and tax competitiveness while others are turning to targeted surtaxes. That divergence creates a competitive dynamic that could intensify over time. If you are a business owner earning $1.5 million in Washington state, you now face a 9.9% state income tax that did not exist a year ago. Across the border in Texas or Florida, you would owe nothing.
Roughly 61% of U.S. adults said they were bothered a lot by the feeling that wealthy people do not pay their fair share of federal income taxes, a Pew Research Center survey of 8,512 adults found in January 2026. That public sentiment gives state lawmakers political cover to advance these proposals.
What Walczak’s warning means if you earn below $1 million
If you earn far less than $1 million, none of these proposals will raise your taxes directly. But the revenue your state collects from millionaire surcharges will fund programs and services that affect you, and Walczak’s warning about volatility is the part you should watch closely.
When state budgets rely on a small number of wealthy taxpayers whose incomes swing with market performance, the programs built with that money become vulnerable to the same market forces. A correction in stock prices or a downturn in business profits could force your state to cut spending on services it has just expanded.
The states enacting these taxes are making a bet that millionaires will stay, that markets will cooperate, and that voters will accept the trade-off. Whether that bet pays off will depend on economic conditions that no legislature can control.
Related: Vanguard says 30% of millionaires feel broke, but it can be fixed
