High Earners Face State Tax Hikes

This guide to the highest-tax states can help top-earners lower their tax burden.

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If you're a millionaire living in California or New Jersey, you might want to consider moving. That's because high earners in those states charge taxpayers some of the highest rates in the country, while others, such as Alaska, charge no income tax at all. When you're bringing home a lot of dough, those differences add up.

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"If you live in a state like New York or New Jersey, or any of the East Coast states, it will really impact your bottom line," says Kathleen Thies, state tax analyst for the tax firm CCH. She says budgetary pressure in many states has led lawmakers to implement bigger tax hikes among high earners. California, for example, added 0.25 percent to each tax bracket for 2009 and 2010, which brings the top marginal tax rate in that state to 10.55 percent. "Politically, it's never a great move to increase taxes, but states have been in trouble, and that's why they're taking these steps," says Thies.

It's not just income taxes, either. Mark Robyn, staff economist for the Tax Foundation, a Washington, D.C.-based research group, says when you consider the entire tax burden states impose, including sales and local taxes, as a percentage of state income, the tax burden in New Jersey is 12.2 percent, about double that of Alaska.

The most expensive states for high earners tend to be on the East and West Coasts, says Thies, but generalizations are difficult to make, especially because tax laws change quickly. In New Jersey, for example, the so-called "millionaire's tax" expired last year, when the highest rate, which applies to those earning over $500,000, fell from 10.75 percent to 8.97 percent. That new rate, says Thies, "is still very high as far as state tax rates go."

Other states still impose "millionaire's taxes," which refer to higher tax rates for people earning high salaries, often $250,000 or $500,000 and up. "It's a bit of a misnomer because it doesn't just apply to millionaires," says Robyn. "[Millionaire's taxes] don't reflect the pattern of lower tax rates where it increases every $10,000. Once you hit a certain income level, you get hit with all these extra taxes," he adds. Even Connecticut, which charges a relatively modest 6.5 percent top tax rate on income over $500,000, is considered to impose a millionaire's tax since the next rate starts at $10,000. In other words, big earners feel singled out.

Hawaii is also expensive with a top income tax rate of 11 percent. The District of Columbia charges a top rate of 8.5 percent, but also froze personal exemptions and deductions through 2013, which means many taxpayers will owe more. Oregonians earning over $125,000 face a new tax bracket of 10.8 percent, and those earning over $250,000 will now pay 11 percent through 2011. New Yorkers earning upwards of $500,000 pay 8.97 percent, while individual filers earning over $200,000 also pay the relatively steep rate of 7.85 percent.

Thies says states that have top marginal tax rates over 6 percent are relatively pricey; lower-rate states such as Arizona, New Mexico, and Mississippi charge top rates around 5 percent or below. Alaska, Florida, Nevada, New Hampshire, South Dakota, Texas, Washington, and Wyoming do not charge general income taxes. Of course, residents still fund state activities in other ways, including through property taxes and sales taxes, but the overall tax burden on residents in these spots tends to be lower.

So do high earners "vote with their feet," as economists like to say, and move to cheaper states? Sometimes, says Robyn. "Economists generally agree that taxes affect people's behavior," he says. When people can easily choose between two nearby states, such as Maryland and Virginia, they likely take taxes into account, especially if they are high earners with a hefty tax burden and the means to move.

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That's one reason New Jersey got rid of its millionaire's tax, says Thies. "It wasn't very palatable. It puts a freeze on people wanting to live in New Jersey when they have a lot of money, and [lawmakers] don't want to drive people out of the state," she adds.