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Some States Taxing Wealth Better, But More Progress Needed

Amid lots of recent talk about the federal government’s need to tax large concentrations of wealth more heavily, state policymakers also should tax wealth better as state budget season begins.

State tax systems have helped drive the nation’s extreme wealth concentration, as wealthy individuals and corporations used their political power to shape state tax policies to their benefit. In response, several states last year expanded their taxes on the assets of the very wealthy — such as stocks, bonds, real estate, boats, and jewelry — and closed loopholes and other special tax benefits that shield many of these assets from state and local taxes.

As of 2016, the latest year for which these data are available, the top 1 percent of households owned roughly 40 percent of the nation’s wealth, while the bottom 90 percent of households owned just 23 percent. This top-heavy structure reduces opportunity for millions of families — particularly Black, Latino, and other families of color, who face great barriers to building wealth due to the legacy of historical racism and the ongoing damage from racial bias and discrimination.

States have several options to improve their taxation of wealth:

  • Estate taxes. State taxes on inherited wealth apply only to the wealthiest individuals and are the main way that states directly tax wealth. Policymakers have weakened federal and state estate taxes in recent years; the federal tax now reaches fewer than 1 in 1,000 estates, and state estate taxes are increasingly rare. But states can take a different path. Last year, for example, Hawaii strengthened its estate tax by adding a higher rate for the largest estates.
  • Mansion taxes. Several states have adopted a tax on high-value housing, often called a mansion tax, that’s tied to a state’s real estate transfer tax (levied when parties transfer ownership of real property, such as by selling a home) or state property tax. Last year, Connecticut, New York, and Washington added higher rates at the top of their real estate transfer taxes.
  • Capital gains taxes. States can strengthen their taxes on capital gains — the profits an investor realizes when selling an asset that’s gained value, such as stock, mutual funds, real estate, or artwork. States that tax long-term capital gains at lower rates than ordinary income could scale back those preferences, as New Mexico and Vermont did last year. States that tax capital gains at the same rate as ordinary income could raise their taxes on capital gains.

Strengthening state taxes on wealth makes sense for several reasons. State tax systems are “upside-down” in the vast majority of states, meaning low- and middle-income taxpayers pay a larger share of their income in taxes than wealthier taxpayers. Taxing the assets of the very wealthy would place greater responsibility for funding critical public services and investments like schools, roads, and health care on those best able to pay.

Reducing today’s extreme concentration of wealth should also help expand equality of opportunity. Families with large savings and other wealth can give their children a much better education, a safety net to enable them to take risks on job opportunities that may not pay off, and loans to help them buy homes in better neighborhoods that will, in turn, give their children a head start. Revenues from taxes on wealth can support investments in all families, such as better schools and colleges, to bolster the long-term growth needed for the country to reach its full potential. They can also support income supplements like state Earned Income Tax Credits to help families struggling to make ends meet.