States Should Adopt the Wealth Proceeds Tax to Raise New Revenue

States are facing considerable fiscal pressures from the fallout of recent federal policies, including the harmful Republican megabill enacted in July 2025. The law gave large tax breaks to wealthy households and corporations paid for, in part, by deep cuts to health care, food assistance, and climate investments. The megabill also imposed significant new costs and responsibilities onto state and local governments.

State policymakers should raise revenue to mitigate the harm to people and communities caused by these federal actions and to expand critical investments that support a more prosperous future for all. Adopting a wealth proceeds tax is an equitable and straightforward option that would raise significant revenue and should be at the top of the list for states.

The wealth proceeds tax, as described by the Institute on Taxation and Economic Policy (ITEP), taxes income from wealth by targeting those types of income that are generated from passive investment, as opposed to income from work, like wages and salaries. The tax applies to income from interest, stock dividends, capital gains, and certain trusts, as well as businesses in which the taxpayer is not actively involved. At the federal level, these forms of income are often taxed at much lower rates than income earned through work.

The federal net investment income tax (NIIT) provides a starting point for states to easily develop and administer their own wealth proceeds tax. The NIIT was established in the Affordable Care Act and designed to address tax inequities by raising revenue from income not subject to Medicare payroll taxes. This targeted tax applies only to the passive income of high-earning households. Taxpayers must report their income from wealth and are taxed only on the portion of their proceeds or profits from wealth holdings that exceeds a relatively high threshold of total income ($250,000 for households and $200,000 for individuals). As a result, households with low and moderate incomes are shielded from the tax entirely.

Since the NIIT is an established requirement for federal income tax reporting, states can similarly adopt a wealth proceeds tax without requiring any additional information from taxpayers. Indeed, for states with existing income taxes, the introduction of this revenue-raising tax would only be an additional page on their income tax returns. This would allow states to increase revenue without the need to draft complicated rules or place burdensome requirements on tax filers.

In addition to being a relatively simple tax to implement, the wealth proceeds tax also provides an opportunity for states to make their tax codes more progressive, generating revenue from those who can most afford it. In most states, income from wealth is taxed less often or at lower rates than income from work, perpetuating a system that preserves wealth rather than rewards work. Since the wealth proceeds tax is tied specifically to income passively generated by wealth, it raises revenue from those who make money by already having money — an inherently fairer approach than raising revenue from less progressive sources.

While states may look to multiple tax policy changes to raise the revenue needed to mitigate harms from recent federal policy decisions and to provide services to their residents, the wealth proceeds tax stands apart as among one of the most progressive taxes available and should be considered before more regressive options.

For example, in 2023, Minnesota lawmakers wanted to expand tax credits for working families and child care. Instead of choosing regressive revenue options, they decided to establish a 1 percent tax on wealth proceeds that exceed $1 million. The tax will now raise an estimated $60 million in 2026.

While the successful implementation in Minnesota provides proof of concept, ITEP proposes an enhanced approach that could lead to even more revenue for states that adopt it. The enhanced wealth proceeds tax would more comprehensively tax capital gains by removing certain federal exemptions from the state tax base, making the tax more progressive and capable of raising significantly more revenue. ITEP estimates that an enhanced wealth proceeds tax of just 4 percent would increase state revenues by a collective $57 billion a year, generating funding in every state to provide critical services to residents and mitigate the harm of recent federal actions.

Whether states opt for the simple wealth proceeds tax as adopted by Minnesota, or the enhanced wealth proceeds tax, both are equitable and easily adoptable policies that can raise revenue to mitigate harm and make vital investments for their communities.