Blue States Impose Surtaxes on High Earners to Capture Revenue from Business Sales and Gains

Blue states have adopted surtaxes, extra taxes added to existing income taxes once income exceeds certain thresholds. These measures target high earners during moments of financial success, such as business sales or stock gains.

A surtax works by requiring payment of the normal state income tax first. The state then applies an additional percentage to income above the threshold. For example, Massachusetts levies a 5 percent flat base income tax plus a 4 percent surtax on income over about $1 million, for a total of 9 percent on amounts above that line. The surtax applies directly to gains from liquidity events like selling a business.

California's top base rate stands at 12.3 percent, with a 1 percent surtax on income over $1 million that raises the effective top rate to 13.3 percent. Officials originally linked this surcharge to mental health funding, but it remains a permanent addition for high earners.

New Jersey taxes income over $1 million at 10.75 percent. Though not always called a surtax, the structure creates a sharp marginal rate increase at that threshold, functioning like a millionaire surcharge.

New York applies a top state rate of up to 10.9 percent on very high incomes. Adding New York City tax pushes the combined rate above 13 percent for top earners. The system's sharp rate jumps at high levels mimic a surtax effect.

Hawaii maintains a top rate around 11 percent. Recent changes introduced higher brackets for top earners, creating a premium tax layer on elevated income levels.

States favor surtaxes because they generate targeted revenue without widespread opposition. High earners, including business owners who create jobs, bear the load. These taxes capture funds from one-time windfalls and carry a political pitch of fairness, even for those paying seven figures in taxes. A small share of taxpayers faces the surtax but produces a large portion of revenue.

Surtaxes strike hardest at key moments: selling a business, exercising stock options or realizing capital gains. Marginal rates jump quickly upon crossing thresholds. In Massachusetts, the 4 percent surtax equals $40,000 on every additional $1 million, with potentially larger losses on business exits. Federal taxes on top make the overall burden substantial.