A Michigan Wealth Tax?

Quick-Take: States are beginning to impose their own wealth taxes to generate tax revenues at the state level to address budget shortfalls.

Background: With the One Big Beautiful Bill (OB3), federal income taxes were kept historically low, and many programs that the federal government funded delivered at the state level were cut-back or are in the process of being eliminated. As such, it will not come as much surprise that many states are now looking at increasing state income tax revenues to address the impact on their delivery of public services that arises from the reduced (or in some cases eliminated) federal financial support. Consider the ‘millionaire surtax’ that some states have implemented or are now considering.

Millionaire Surtax: Massachusetts, Minnesota, and Washington State have all adopted millionaire surtaxes that add a percentage to the tax rate on annual income above a certain threshold.

Massachusetts: In 2022 Massachusetts voters approved a 4% surtax on annual income over $1.0 million, which additional revenue was dedicated to support public education and transportation. This surtax generated an additional $3 billion in revenues for the state in 2024.

Minnesota: In Minnesota, starting in 2024, individuals, estates and trusts must pay a 1% tax on their net investment income that exceeds $1.0 million. The state defines net investment income to include interest, dividends, capital gains, rental, and royalty income.

Washington: Washington state does not have a personal income tax. In 2021 it passed a 7% tax on capital gains over $250,000. This tax was challenged in court, but it survived efforts to have it repealed. This Washington surtax raised over $1.2 billion which is dedicated to expanding public investment in education. Now, a proposal is being debated to expand this Washington millionaire surtax to add a ‘financial intangibles tax’ that would cover assets like stocks, bonds, ETFs, and mutual funds. If this proposed legislation is adopted (Washington’s Senate has approved the bill) it is estimated that it will generate another $1.5 billion in tax revenues for the state to use.

Michigan: Michigan is looking at a ballot initiative, called Invest in MI Kids, that would impose a surtax on high earners. This proposal would amend the Michigan Constitution to add a 5% surtax on annual taxable income over $500,000 for a single individual and $1.0 million for a married couple who file jointly. The expected revenue from this surtax would go exclusively to K-12 education (if, you actually trust the Michigan Legislature to honor that limitation, given its past practice of moving unique sourced tax revenues in a manner inconsistent with what the legislature promised to use it for.)

Arguments Against Millionaire Surtaxes: These state wealth taxes face consistent arguments against them.

Millionaire Flight: Probably the most prominent argument against these surtaxes is that millionaires will flee the state to avoid having to pay the surtax, and that such out-migration will undercut economic progress in the state. The response to this argument is that high-wealth individuals choose where they live based on their family background, their communities, their jobs, and their connections, not so much their taxes. (We’ll see if several states continue to not impose any income tax.)

Local Business Owners Will Be Hurt: This argument is that a surtax will harm local business owners. The response to this observation is that most local business owners are not clearing a million dollars a year in their personal take-home income after they reinvest in their business, pay their staff, pay local taxes, and pay other expenses. The response asserts that those same local small businesses that will probably not pay the surtax will nonetheless benefit if the surtax revenues are dedicated to local education and transportation investments.

Tax on Values: Yet another argument against a wealth surtax, or at least those surtaxes that are imposed on the value of assets like Washington’s, is that values regularly go up and down, often due solely to inflation, which might lead to an illusory increase in an individual’s wealth. Restated, the ‘value’ of an asset is only theoretical until it is actually sold. In addition, for some assets like artwork, antique cars, jewelry, and other collectibles, often there is not a liquid market readily available that can be referenced for annual valuation purposes. The response to this argument is that taxing financial assets is not any different than the imposition of real property and homestead taxes on real estate values, which the middle class has come to live with.

Conclusion: This new interest in state wealth taxes could reflect a ‘be careful what you ask for (at the federal level with OB3) because you might actually get it.’ If the federal government is cutting back on programs that it used to financially share with the states, the states are not going to idly stand by and watch many of their public service programs disappear. If income tax obligations paid to the federal government will be less, e.g., higher standard deductions, multiple new tax deductions for SALT, tips, overtime, QBI, seniors, and opportunity zones, thus leaving more money in the hands of taxpayers,  there is no question that state governments will also want to get their hands on their citizens’ after-tax funds.

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