The State Tax Divide: What High-Tax State Residents Need to Know Now

by | Feb 17, 2026

ARTICLE | February 17, 2026

 

If you live in a state with high income taxes, you've likely noticed the growing gap between what you pay and what residents of other states are paying. The numbers tell a stark story: two decades ago, 21 states had top rates between 5 and 7 percent. Today, only 12 do. Meanwhile, 26 states now have top rates below 5 percent or no income tax at all, while six states have climbed to double-digit rates.

This isn't just an interesting trend—it's a fundamental shift that demands strategic action from businesses and high-net-worth individuals in high-tax states.

The New Tax Reality

The middle ground in state taxation is disappearing. Since 2021, 23 states have cut their top marginal income tax rates, while only six states (plus the District of Columbia) have raised them. Some states are considering dramatic increases—proposals in several states would push top rates from under 6 percent to nearly 10 percent.

This growing divide increases risks for those in high-tax states. Not only are their rates far higher than historical norms, but taxpayers now have more low-tax alternatives than ever before—and greater incentives to consider them. With increased mobility for both individuals and businesses, the friction costs of relocating are being offset by the potential long-term savings.

What You Should Be Doing Now

If you're a business owner or high-net-worth individual in a high-tax state, waiting isn't a strategy. Consider these critical steps:

Evaluate your multi-state exposure. Many business owners don't realize they may already have tax obligations—or opportunities—in multiple states. Understanding where you have nexus and how different states would treat your income is essential for proper planning.

Review your domicile and residency status. State tax authorities are increasingly aggressive in challenging taxpayer claims of residency changes. If relocation is on your radar, proper documentation and planning are critical.

Assess business structure and location decisions. The right entity structure can make a significant difference in your state tax burden. Additionally, if you're considering expansion or new locations, state tax rates should be a key factor in your analysis.

The Bottom Line

The era of the "typical" state income tax is over. As states continue moving in opposite directions, the financial implications for businesses and individuals become more significant each year. The question isn't whether this divergence will affect you—it's whether you'll plan strategically to address it.

At KHA Accountants, PLLC, we've been helping businesses and high-net-worth individuals navigate complex state and local tax issues for over 50 years. Our team stays current on changing state tax laws and can help you develop a comprehensive strategy that protects your wealth and positions your business for success, regardless of where you're located.

Don't let state tax policy changes catch you off guard. Contact KHA today to schedule a consultation with one of our state and local tax experts and discover how strategic planning can help you minimize your tax burden and maximize your opportunities in this rapidly changing environment.

 

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