NCPA - National Center for Policy Analysis


February 2, 2005

California most recently adopted the "millionaire's tax," an additional levy on wealthy entrepreneurs who earn over a specified amount. The tax, according to the Tax Foundation, does little more than penalize small businesses.

Four other states -- New Jersey, New York, Vermont and Ohio also levy taxes on high-wage earners.

  • About 28,000 New Jersey residents pay an additional 2.6 percent (for a total of 8.97 percent) on income earned over $500,000, giving the state the fourth highest income tax rate in the nation.
  • New York imposes a total tax rate of 7.7 percent on income over $500,000.
  • Vermont imposes a whopping 9.5 percent tax on incomes above only $311,000.
  • California's new tax will add an additional one percent on earnings over $1 million in order to fund mental health services.

The problem with such a tax, however, is the burden it imposes on S corporations and LLC partners, who can record their business profits on their personal income tax returns. Most of profit is put back into purchasing capital, so businesses will have to find ways to pay the extra tax, usually by sacrificing new equipment and new hires.

Source: Darren Dahl, "Fancy-Sounding Tax Hurts S Corps," Inc., January 2005. "State Individual Income Tax Rates," Tax Foundation.


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