Blue States Are Chasing Away Their Tax Bases: A Surge in Taxes on High Earners Is Leading to a Mass Exodus

Last week lawmakers in Washington state passed a tax bill that will impose a 9.9% tax on income over $1 million for individuals or couples in a household. Lawmakers argue that this aggressive new tax is needed to address the state’s multi-billion-dollar deficit. Instead, the tax will likely drive the highest-earning Washingtonians out of the state.

Only 5 years ago, Washington was one of 9 states with no income tax, and now the state is well on the way to having a combined state and local top tax rate north of 18%. When combined with federal taxes, Washington’s top earners will be subject to a 58% marginal tax rate.

This isn’t the first time Washington politicians have attempted to fund their spending habits by taxing the rich. In 2021, policymakers in Olympia passed a 7% tax on capital gains for incomes above $250,000. This tax came into effect in 2022 and did nothing to improve the state’s deficit problem. And yet, here we are again.

One obvious reason why the 7% capital gains tax didn’t solve Washington’s budget problem is because state policymakers remain profligate in their spending habits—Washington’s biennial budget has effectively doubled over the past decade.

Another reason why the tax didn’t solve their budget woes is because the additional tax burden encouraged high-earning Washingtonians to leave the state and take their incomes with them.

The chart below shows the net migration of earners making more than $200,000 between 2015 and 2022.[1] Over 2,300 high earners left the state on net in 2021, the year the 7% tax was enacted, and almost 6,400 more left in 2022 when the tax came into effect.

As the next chart shows, the high earners exiting the state in 2021 and 2022 also took their incomes with them. In 2022 alone, nearly $2 billion in income among this high-earning group left the state.

Not only did the exit of some of the state’s highest earners narrow the tax base, but it also meant many of the state’s business owners, job creators and entrepreneurs took their talents elsewhere.

Amazon CEO Jeff Bezos left the state around this time, moving his primary residence to Florida, which has no state income tax. Since moving to Florida, Bezos filed to sell up to 75 million Amazon shares in 2024 alone and has already sold roughly $13.5 billion worth of stock. This is income that Washington state won’t be taxing as revenues for its coffers.

After the Washington Supreme Court ruled the capital gains tax constitutional, Ken Fisher of Fisher Investments departed the state and moved to Texas, taking his business with him.

And now, with yet another heavy tax burden being implemented in Washington, Howard Schultz, former CEO and early backer of Starbucks, has revealed that he will be departing from Washington in favor of Florida.

Washington state isn’t alone in imposing burdensome taxes on the income and even assets of high earners. In 2022 Massachusetts enacted a 4% tax on millionaires on top of its flat income tax, while other states such as Minnesota and Maryland have since imposed capital gains surtaxes on high earners in recent years.

Now, blue states such as California are inching toward taxing the net worth of wealthy state residents. Recent analysis finds that publicly confirmed departures have already eliminated over $550 billion from California’s tax base.

Just like in Washington, high earners, entrepreneurs and innovators are leaving California for red states with no income tax, such as Texas or Florida. As a result, the proposed wealth tax is estimated to actually worsen California’s budget by reducing the net present value of revenues by almost $25 billion.

Many blue-state lawmakers continue to treat high earners as an immovable tax base that can be tapped repeatedly to close budget gaps. But taxpayers are not fixed assets. When states sharply raise tax burdens, many of the people paying those taxes simply leave.

Washington’s experience should serve as a warning. The capital gains tax failed to solve the state’s budget problems, and now lawmakers are doubling down with an even steeper income tax on the same shrinking pool of taxpayers. If the past few years are any guide, the likely result is not a stable new stream of revenue. but more departures, a narrower tax base and yet another fiscal shortfall.

States that continue to chase their highest earners with ever higher taxes may eventually discover that the tax base they were counting on has already packed its bags.

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[1] $200,000 and over is the highest income group that the IRS gross migration data breaks down.