Maine Enacts 2% Surcharge on Million-Dollar Incomes, Joining Blue-State Trend

AUGUSTA, Maine — Governor Janet Mills signed a state budget in mid-April 2026 that includes a new 2% tax surcharge on high earners, making Maine the latest Democratic-led state to implement a so-called “millionaire’s tax.” The law, which takes effect in the next tax year, will levy the surcharge on annual income exceeding $1 million for single filers and $1.5 million for joint filers and heads of households. The change pushes Maine’s top marginal income tax rate to 9.15%. The new tax is projected to affect approximately 2,600 tax filers annually, according to state estimates. The Maine legislature anticipates the surcharge will generate around $74 million in new revenue per year. The Institute on Taxation and Economic Policy (ITEP), a progressive think tank, offered a slightly higher projection, estimating the tax could raise nearly $100 million in fiscal year 2027. The measure’s passage marks a significant policy shift for Governor Mills, who had opposed similar tax proposals for years. Her approval came as part of a broader budget compromise that also included $300 relief checks for many Maine residents. The outcome is being hailed as a major victory for progressive organizations like the Maine Center for Economic Policy, which advocated for the bill, and a defeat for business groups like the Maine State Chamber of Commerce, which argued against it. While the tax is aimed at high-income individuals, its structure will have a direct impact on many small and mid-sized business owners. According to an analysis of the latest available IRS data from 2022, only 22% of income reported above the $1 million threshold in Maine came from wages. A full one-third was derived from pass-through business income—profits from entities like S-corporations, LLCs, and partnerships that are taxed on the owner’s personal return. Another third came from capital gains, which can include proceeds from the sale of a business, real estate, or other investments. Proponents argue the surcharge is a necessary step toward tax fairness and fiscal responsibility. They point to Maine’s projected $600 million budget shortfall and the need to fund critical services in healthcare, childcare, and education. Maura Pillsbury, a tax policy analyst with the Maine Center for Economic Policy, said the tax asks “folks with more to pay their fair share.” ITEP noted that Maine’s tax system has been regressive at the top, with the highest earners paying a lower effective tax rate than many working-class families. Maine’s new law is part of a growing national trend. Similar taxes on high earners have been enacted in other blue states, including California, New York, and Massachusetts. Washington state also recently passed a tax on high-value capital gains, and legislators in Connecticut, Maryland, and Vermont have debated comparable proposals. Supporters of the Maine bill drew inspiration from the experience in Massachusetts, where a millionaire's tax was implemented in 2023. Pillsbury noted that data from Massachusetts showed an increase in the number of millionaires after its new tax took effect, countering claims that such policies inevitably lead to wealth flight. Opponents, however, maintain that the tax will harm Maine’s economic competitiveness. Critics have warned the surcharge will punish local business owners, discourage investment, and potentially drive high-income households to states with more favorable tax climates. They argue that because a large portion of the targeted income is from volatile sources like capital gains and business profits, the tax could disproportionately affect entrepreneurs and investors who realize a one-time gain after years of building a company. This is not the first time such a proposal has gained traction in Maine. In 2016, voters approved Question 2, a ballot initiative that would have created a 3% surcharge on income over $200,000 to fund education. However, the measure was later repealed by the state legislature as part of a budget deal signed by then-Governor Paul LePage, overriding the direct will of the voters. The focus on a round 'million-dollar' income figure can be misleading for business owners. Unlike a salaried employee, a business owner's income can be highly irregular and subject to one-time events. A significant portion of the income targeted by this new Maine surcharge is not recurring salary but rather pass-through business profits and capital gains. We often see clients experience a single high-income year due to the sale of a business, a major real estate transaction, or a particularly successful project. This law could penalize a lifetime of work realized in a single tax year, treating it the same as a consistently high annual salary. This creates a complex planning environment where timing becomes critical. Proactive strategies around income recognition, entity structuring, and capital gains management are no longer just best practices; they are essential for mitigating significant tax liabilities. For business owners in Maine and other states considering similar measures, this underscores the importance of integrated financial planning. This is precisely the kind of challenge where our tax preparation and compliance services provide critical value, helping businesses navigate these state-specific complexities. Business owners facing these new rules can explore their options with C&S Finance Group LLC at csfinancegroup.com. Moving forward, business groups and economists will be closely monitoring the economic effects of the new tax in Maine. Key data points will include trends in high-income taxpayer migration, business formation and investment, and the stability of the revenue generated. The results from the Pine Tree State will likely serve as a crucial case study for other states considering similar wealth-tax proposals in the coming legislative sessions.