NCPA - National Center for Policy Analysis

Trend No. 1: "Millionaires' Taxes"

June 29, 2012

Conventional wisdom holds that states turn to income tax increases only as a last resort in dealing with state budget gaps.  Much more politically attractive are policies such as furloughing employees, increasing withholding, raising fees, imposing excise taxes like cigarette taxes, and just not paying bills.  After those things, then come the sales tax and finally the income tax, says Joseph Henchman, an attorney and policy analyst at the Tax Foundation.

This recession has been different on that score.  Some states have been more willing to raise income taxes by designing the increase to affect only a small subset of high-income earners.  Commonly classified as "millionaires' taxes," these new tax provisions often kick in at levels much lower than $1 million in income.

  • Beginning in 2003, New York adopted two new top brackets with a top rate of 7.7 percent applied to income over $500,000.
  • New Jersey followed its neighbor in June 2004 when then-Governor James McGreevey signed into law an 8.97 percent tax rate on income over $1 million, raising the top rate from 6.37 percent.
  • In November 2004, California voters approved the creation of a 10.3 percent top rate on income over $1 million to fund mental health services programs.
  • As part of a budget package designed to pay for expanded state services, Maryland in 2008 added four new income tax brackets, including a top rate of 6.25 percent on income over $1 million.
  • In 2009, nine states increased income tax rates, which included New Jersey, California and New York, despite their recent increases.

Interestingly, despite this trend in which states imposed millionaires' taxes in order to cover budgetary shortfalls, Washington state residents voted for the seventh time in 2010 to reject a state income tax.

  • Initiative 1098 would have imposed a tax of 5 percent on income over $200,000 and 9 percent on income over $500,000, affecting just 1.2 percent of the population.
  • However, the promise to use the money to provide some tax cuts and boost spending couldn't convince voters to junk a key advantage Washington has over other states.
  • Voters recognized that entrepreneurial activity is highly mobile, and that imposing a substantial income tax on the wealthy would have the effect of scaring away potential economic growth.

Source: Joseph Henchman, "Trend #1: 'Millionaires' Taxes,'" Tax Foundation, June 15, 2012.

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