States Are Rejecting Millionaire Taxes

Millionaires can breathe a bit easier. While President Barack Obama says he wants to let income tax cuts that benefit only the wealthiest Americans expire in 2013, several states are rolling back tax increases for top earners.

New York's highest tax rate on incomes exceeding $500,000 will fall back to 7.85 percent, from 8.97 percent, this year. Maryland's 6.25 percent tax on incomes above $1 million expired at the end of 2010, while California's top tax rate for millionaires has dropped to 10.3 percent from 10.55 percent.

At least seven states instituted temporary so-called millionaire taxes during the recession. Those levies are becoming harder to justify now that state revenues are rebounding. Overall, state tax revenue grew 12 percent in April compared with a year earlier, which may trim $20 billion from estimated state budget shortfalls, according to a recent Goldman Sachs (GS) report. The soak-the-rich drive "just petered out," says Joseph Henchman, vice-president for legal and state projects at the Tax Foundation in Washington, a group focused on lowering taxes. "All of these states are backing away now."

Business groups have been vocal opponents of the temporary hikes. The Business Council of New York State has opposed efforts to maintain the tax increase on the grounds that such measures are an indirect tax on business income. Most business owners who are paid by partnerships or S corporations report business income on their individual returns. Kenneth J. Pokalsky, the Business Council's senior director of government affairs, says 25 percent of revenue generated from the state's tax on higher earners came from business income. In California, the Silicon Valley Leadership Group, whose members include Bank of America (BAC), Apple (AAPL), and Microsoft (MSFT), along with 12 other business groups, have told lawmakers that tax increases should be extended only if lawmakers agree to "structural reforms" of the budget.

Republicans, who typically oppose tax hikes, now hold a majority of governorships—29—and many were elected last year after campaigning against tax increases. New Jersey Governor Chris Christie, a Republican, received national attention after vetoing a bill that would have extended a tax on millionaires in the state.

Some Democrats are also fighting the higher taxes. New York Governor Andrew Cuomo sparked a battle with fellow party members in the legislature earlier this year by opposing legislation that would maintain the higher rates on individuals earning more than $1 million. Maryland Governor Martin O'Malley, a Democrat, didn't push to extend his state's millionaire tax last year. "I would like to think it's because these are not very good policies," Henchman says. "If you're a conservative, you don't really like these taxes. If you're a liberal, these [state] services should be so important that everyone should have to pay for them."

The American public is almost evenly divided on the question of whether the wealthy should shoulder a higher tax burden. A Gallup poll released on June 2 found 49 percent of respondents opposed higher taxes on the rich, while 47 percent supported them.

Kim Rueben, director of the state and local program at the Tax Policy Center in Washington, a nonpartisan research organization, says higher tax rates are tough to sustain in states that have progressive tax codes. New York, for instance, has seven tax brackets, with the highest rate kicking in at an annual income of $500,001. "There are certain places that I think can afford to increase the progressivity of their tax system," she says. "In places that have a more progressive system, like California and New York, it becomes harder to keep raising that revenue."

A few states are bucking the national trend. Connecticut has raised its top tax rate from 6.5 percent to 6.7 percent. Oregon voters approved a measure in January establishing two new tax brackets: 10.8 percent for those earning more than $125,000 and 11 percent for those making more than $250,000. District of Columbia Mayor Vincent Gray proposed raising taxes for residents earning more than $200,000, but the District council nixed the plan. Someone making "$200,000 is not a rich person," says Barbara Lang, president of the D.C. Chamber of Commerce. "It's not a lot of money."

The bottom line: New York, Maryland, and California are knocking down tax rates for high earners, while the District of Columbia has nixed an increase.

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