Rhode Island weighs new tax on highest earners as Trump policy pressures mount

Rhode Island is moving closer to a new tax on high earners, adding to a growing patchwork of state measures aimed at the wealthy that advisors will have to keep tabs on for affluent clients with multistate ties.

Governor Dan McKee, who previously resisted calls for higher income taxes, is now signaling openness to a surtax on top earners as federal cuts squeeze the state’s finances.

As reported by Bloomberg, Lawmakers are revisiting a proposal for a 3% surtax on income above $640,000, roughly the top 1% of earners in the state, to help plug a projected deficit of at least $101 million for the fiscal year starting in July. McKee’s office has also floated an income threshold of $1 million for any wealth tax.

“We are in a spot where we’re going to have to address some of those headwinds that are coming our way from DC,” McKee said, pointing to reductions in Medicaid, food assistance and other programs by the federal government under President Donald Trump.

The debate in Providence mirrors a broader shift among Democratic policymakers who are turning to high-income households and owners of luxury property to shore up budgets and address what they see as a K-shaped economy. Neighboring Massachusetts has become a key reference point with its 4% surtax on income above $1 million, approved in 2022, which has reportedly generated billions in additional revenue.

On the West Coast, a billionaire tax proposal in California that would place a one-time 5% levy on all the worldwide assets of billionaires who resided in the state as of January 1 has sparked swift reactions from critics warning of a resultant wealth exodus. 

For advisors, Rhode Island is already a test case in using real estate taxes to target the wealthy. A new surcharge on second homes valued at more than $1 million, dubbed the “Taylor Swift tax,” takes effect this summer. For non-primary residences, or properties not occupied more than half the year, the state will charge $2.50 for every $500 in assessed value above the first $1 million, on top of existing property taxes.

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Luxury brokers have warned the levy hits the very people supporting much of the local economy in seasonal communities like Newport and Watch Hill. “These are people who just come here for the summer, spend their money and pay their fair share of taxes,” Donna Krueger-Simmons, a sales agent in Watch Hill, told CNBC when that property tax was unveiled. “They’re getting penalized just because they also live somewhere else.”

Critics say some second-home owners are weighing sales and prospective buyers are pausing purchases or looking to coastal alternatives in nearby Connecticut. That kind of cross-border arbitrage will be familiar territory for advisors whose clients can choose among multiple high-end destinations.

Advocates counter that higher taxes on second homes and top incomes are necessary to keep tourist towns livable for year-round workers who keep service economies running. One commentary by the Institute on Taxation and Economic Policy argues that wealthy vacation-home owners and high earners can absorb surtaxes that fund housing, infrastructure and local services, and that states should design broad, progressive real estate and income tax systems rather than leaning on middle-income residents.

The proposed income surtax failed to make it into last year’s budget but is expected to be a central flashpoint in the current session. Rhode Island Senate President Valarie Lawson has supported earlier versions, while House Speaker Joe Shekarchi has said he is open to the idea but uncertain where the income line should be drawn.

“You can say tax the rich, but what is the rich?” he said.