Bills pending in the Virginia state legislature could raise the state income tax a lot. The most likely to pass bill would increase the state income tax rate from 5.75% to 8% on incomes over $600,000 and 10% on incomes over $1,000,000. Another bill would impose an additional 3.8% tax (a “net investment income tax”) on most income above $500,000. If both bills pass, Virginia would have an 13.8% tax rate. That would be higher than what is currently the highest state tax rate in America, the 13.3% rate in California for households with million-dollar incomes. It would be far higher than the top tax rates in the region around Virginia, such as the 3.99% tax rate in North Carolina, the 4.82% rate in West Virginia, and the zero percent tax rate in Tennessee, which has no state income tax.
The most likely to pass bill is HB 979, introduced by Delegate Vivian Watts, the powerful chair of the Finance Committee in Virginia’s House of Delegates. HB 979 “establishes two new tax brackets beginning on and after January 1, 2027, that tax income in excess of $600,000 but not in excess of $1,000,000 at a rate of eight percent and income in excess of $1,000,000 at a rate of 10 percent.”
“Something like this has an excellent chance of passing now,” said a Virginian who spent years lobbying Virginia legislators about tax and other issues.
Virginia is now one of the higher-tax states both in terms of dollars paid, and tax burdens compared to other states.
But HB 979’s sponsor, Delegate Watts does not seem to realize this. She is a veteran legislator who has served since 1996, when Virginia was a low-tax state. On her web site, she expresses the outdated belief that Virginia has unusually low taxes, which hasn’t been true for years. For example, she says Virginia has “low taxes (44th per $1000 of personal income.” That’s in an article first posted on her website several years ago, when Virginia already had a higher state income tax rate (5.75%) than a majority of states (7 states had no state income tax at all in 2020, two other states only taxed interest and dividends, and others had much lower rates than Virginia, like North Dakota’s 2.9% maximum rate). Unlike Virginia, some states have no sales tax, such as Montana, New Hampshire, Alaska, Delaware, and Oregon.
Virginia is already a somewhat high-tax state. The Tax Foundation notes that in 2022, Virginia ranked 20th in state and local tax collections per capita, $6845. In 2025, Virginia ranked a bit below average in state tax competitiveness, due to higher-than-average levels of taxation.
Times have changed, but not Delegate Watts’ outdated impression that Virginia is a low-tax state. So she is eager to raise tax rates, which could result in Virginia having much higher tax rates than neighboring states, like Kentucky (which has a 3.5% maximum state tax rate) and North Carolina (which has a 3.99% tax rate). Setting Virginia taxes higher than neighboring states will result in some wealthy people relocating to those states to avoid Virginia taxes on their investment income. People who work in Danville or Virginia Beach can move their home to nearby North Carolina to avoid higher taxes. That would shrink Virginia’s tax base and leave Virginia worse off.
Delegate Watts may not have given much thought to that possibility, because for almost all of her time in the Virginia legislature, neighboring states had higher income tax rates. North Carolina once had an 8% top income tax rate. Even in 2015, Virginia still had lower state income tax rates than North Carolina, West Virginia, and Kentucky. Back then, the top marginal tax rate was 6.5% in West Virginia, 6% in Kentucky, and 5.8% in North Carolina, compared to 5.75% in Virginia. But since then, most of Virginia’s neighbors have cut tax rates a lot, unlike Virginia, reducing tax rates to below 4% or 5%.
Due to high taxes and high living costs in Virginia, a modest number of people are already moving from Virginia to West Virginia and states south of Virginia like North Carolina, Tennessee, and Florida. That exodus could grow into a flood if taxes in Virginia go up to 8% or 10% from 5.75%, making it much more expensive to live in Virginia.
When Maryland raised taxes on millionaires, many moved out of state, resulting in Maryland raising less revenue as a result. The Tax Foundation described how Maryland’s tax base shrank:
The Comptroller of Maryland has reported that the number of “millionaire” returns tumbled sharply between 2007 and 2008, a 30% drop in filers and 22% drop in declared income. Rather than income taxes from this group rising by $106 million, they fell by $257 million….One-in-eight millionaires who filed a Maryland tax return in 2007 filed no return in 2008….A Bank of America Merrill Lynch analysis of federal tax return data on people who migrated from one state to another found that Maryland lost $1 billion of its net tax base in 2008 by residents moving to other states.
Maryland’s tax on millionaires didn’t raise tax rates to 10%, as the proposed Virginia tax increase would. But it was still enough to drive rich people out of the state, and reduce the state’s tax base, leaving Maryland worse off.
Delegate Watts’ 10% tax rate could do even more damage to Virginia’s economy, because it would give rich people an even bigger incentive to leave, and thus shrink Virginia’s tax base even more than Maryland’s tax base shrank. It could end up shrinking both Virginia tax revenue and the size of Virginia’s economy.
Another pending bill — by Delegate Elizabeth Bennett-Parker, HB 378 — would impose a 3.8% “net investment income tax” on most income above $500,000. Add this 3.8% tax to Delegate Watts’ 10% tax rate, and you get a 13.8% top tax rate in Virginia. This 3.8% tax rate would apply to most income above $500,000, because it applies to interest, dividends, and capital gains, as well as business income, which basically all high-income taxpayers have, and accounts for much of their income. Taxpayers making $10 million or more get about 50% of their income from capital gains, about 25% from business income, and over 90% of their income is subject to tax by HB 378.
Investors are usually more mobile than wage earners, so raising taxes on investors makes even more of them leave the state, and results in even more shrinkage of the tax base.
Raising marginal tax rates in Virginia to 10% or 13.8% would harm Virginia by reducing the migration of prosperous and productive people into Virginia from Maryland. Right now, more people move from Maryland to Virginia than from Virginia to Maryland, resulting a net migration of thousands of people from Maryland to Virginia in recent years. But Marylanders would be less likely to move to Virginia if Virginia had higher taxes than Maryland.
