Will states' tax proposals on high earners go national?

It's not just California and New York where wealth tax proposals are making waves. Two income tax bills moving through Virginia’s 2026 legislative session could materially change the state’s appeal for high earners, small-business owners, and the advisors who work with them.

That's according to the Tax Foundation, a tax policy research group, which is highlighting House Bills 378 and 979 as measures that would move Virginia closer to the top of the national rankings for both ordinary and investment income taxes – even as elected officials continue to emphasize affordability.

According to a new analysis by the think tank, HB 378 would add a new 3.8% net investment income tax on individuals, trusts and estates starting in 2027. Modeled on the federal levy, it would apply to dividends, interest, capital gains, rental income, and other passive business income once federal modified adjusted gross income exceeds $500,000. The tax would be assessed on the lesser of a filer’s net investment income or the amount by which their income surpasses that threshold.

Combined with Virginia’s existing top individual rate, the proposal would push the top marginal tax rate on investment income to 9.55%. By the Tax Foundation's reckoning, that would place Virginia ninth nationally for top investment income rates, behind high-tax states such as California, New York, and New Jersey, as well as the District of Columbia and Washington state.

In California, a proposed 5% wealth tax on billionaires has already prompted some advisors to craft exit plans, while in New York, new mayor Zohran Mamdani is pushing for a tax hike on the wealthy.

Read more: RIAs weigh exits amid California billionaire tax proposal

HB 979 would layer on new brackets for high ordinary income, imposing an 8% rate on income above $600,000 and a 10% rate on income above $1 million, also beginning in 2027. As with the state’s current structure, the new brackets would not be indexed to inflation, exposing more taxpayers to higher rates over time through bracket creep.

Regionally, the Tax Foundation notes that even when factoring in local levies in neighboring states, Virginia would quickly become an outlier. “HB 979, with its proposed 10 percent top rate, would put Virginia behind only the District of Columbia (10.75 percent) for the highest combined state and average local income tax rate in the region,” the analysis said.

The bill includes some relief at the lower end by raising the standard deduction to $10,000 for single filers and $20,000 for married couples, up from $8,750 and $17,500, and indexing those amounts to inflation beginning in 2028. But the analysis warns that the interaction with the state’s spouse tax adjustment could “create a massive marriage penalty” for high-income couples.

For closely held businesses and RIAs taxed as pass-throughs, the stakes are high. “According to the US Small Business Administration, Virginia’s 880,366 small businesses employ 1.6 million people, representing 45.9 percent of Virginia’s employees,” the Tax Foundation wrote, arguing that higher marginal rates would constrain growth, reinvestment and hiring.

If both HB 378 and HB 979 are enacted, the group estimates Virginia would top every other state for investment income taxation. “Should HB 378 and HB 979 both pass, Virginia would impose the nation’s highest top marginal state individual income tax rate on investment income at 13.8 percent, even higher than the rates on investment income in California, Hawaii, New York, and Minnesota,” the analysis said.

Virginia, California, and New York are just three states in a recent blue wave of jurisdictions contemplating tax hikes on their wealthiest or highest-income residents, which have prompted sharp reactions from critics warning of capital flight.

On that note, the Tax Foundation said Northern Virginia residents who work in Washington, DC, or Maryland, but pay tax where they live because of reciprocity agreements and a commuter provision may have to weigh their options. If Virginia’s tax burden converges with or exceeds those neighbors, the think tank said some high earners “may find Maryland or DC a more attractive place to live, depriving the Commonwealth of tax revenue.”