Summary: States are increasingly adopting targeted taxes on high-income and high-net-worth individuals instead of broad-based tax increases. These measures include income surtaxes, capital gains taxes, net investment income taxes, and taxes on high-value or non-primary residences. While many proposals are still evolving or face legal challenges, taxpayers should monitor changes that could affect residency, investment income, real estate ownership, and overall state tax liability. Proactive planning can help taxpayers evaluate potential exposure and prepare for shifting state tax policies.

How States Are Expanding Taxes on High-Income and High-Net-Worth Taxpayers

States continue to look for new ways to raise revenue without broad-based tax increases Increasingly, legislators are targeting taxpayers perceived to have the greatest ability to pay through taxes on high incomes, investment income, capital gains, and high-value real estate.

While these measures are often described as “wealth taxes,” they differ significantly in design and operation. Some operate as increasing rates on high-income earners, with others imposing surtaxes on capital gains or net investment income, and some targeting second homes or high-value non-primary residences.

Although many proposals have yet to become law, the broader trend suggests states are increasingly exploring targeted taxes on affluent taxpayers perceived to have the greatest ability to pay. For affected taxpayers, these taxes can raise complicated issues involving residency, asset location and composition, valuation, and even constitutional limitations.

While not exhaustive, the examples below illustrate several approaches states are using to target high-income and high-net-worth taxpayers.

State Income Taxes and Millionaire Surtaxes

Several states have already enacted or expanded income-based taxes aimed at high earners.

Washington Expands Capital Gains and High-Income Taxes

Washington remains one of the most closely watched examples. Although Washington historically has not imposed a broad-based personal income tax, it previously enacted a tax on certain long-term capital gains. Beginning with tax year 2025, Washington’s capital gains tax applies at 7% on the first $1 million of taxable Washington capital gains and 9.9% on taxable Washington capital gains above $1 million. More recently, effective beginning in 2028, Washington enacted a 9.9% tax on Washington taxable income above $1 million. The constitutionality of that law has drawn, and is expected to continue drawing, legal and political scrutiny.

Rhode Island, Massachusetts, and Illinois Target Millionaire Income

Similarly, Rhode Island’s new fiscal year 2027 budget includes a new millionaire’s tax on personal income over $1 million, which phases from a 1% surtax beginning Jan. 1, 2027, to a 3% surtax beginning Jan. 1, 2029, effectively increasing the state’s top marginal rate beyond 5.99%.

Massachusetts continues to impose its voter-approved 4% surtax on resident and nonresident taxable income above the inflation-adjusted $1 million threshold. In the most recent legislative session, Illinois’ legislators considered, but did not pass, a constitutional amendment that would have imposed an additional 3% tax on individual net income greater than $1 million.

State Taxes on Investment Income and Capital Gains

Other states have adopted targeted taxes or surtaxes that focus on investment income or capital gains. Minnesota imposes a 1% tax on net investment income of individuals, estates, and trusts in excess of $1 million. In 2025, Maryland enacted an additional 2% tax on net capital gain included in Maryland adjusted gross income for individuals with federal adjusted gross income over $350,000, without regard to filing status.

Property Taxes Targeting High-Value and Second Homes

Some states have pursued taxes tied to ownership of high-value real estate rather than income.

In addition to the income tax, Rhode Island enacted the Non-Owner Occupied Property Tax Act, which applies beginning July 1, 2026, to certain non-owner-occupied residential properties assessed at $1 million or more.

As part of the 2026–2027 New York State Budget Bill, New York enacted a tax on certain high-value New York City residences that are not used as a primary residence, often referred to as a “Pied-à-Terre Tax.”

Florida is considering a different approach, which would expand tax relief for homestead property while potentially shifting more of the property tax burden to non-homestead property, including second homes, rental properties, and commercial properties.

California’s Proposed Direct Wealth Tax

Another unique approach, California has a proposed 2026 ballot initiative that would impose a one-time 5% tax on the net worth of California individuals with net worth of $1 billion or more and on applicable trusts. Unlike an income surtax, the proposal is more akin to a wealth tax because it would apply to accumulated net worth rather than realized income.

What High-Income Taxpayers Should Watch Next

For high-income and high-net-worth taxpayers, the key takeaway is that state tax liabilities may arise outside the traditional income tax rate structure. States are showing increased interest in targeted tax bases, including capital gains, net investment income, second-home ownership, and other high-value assets or activities. Not every proposal will become law, and some enacted measures face significant legal and political challenges. Taxpayers should monitor legislative developments, evaluate residency and domicile positions, and consider how asset location, real estate ownership, and investment activity may affect current and future state tax liabilities.

KSM’s tax professionals are closely monitoring these developments and can help you evaluate your exposure, model potential outcomes, and adjust your strategy accordingly. Connect with your KSM advisor or complete the form below to start a conversation.