Get Out of Our Hair, NIITs!
It’s a parental rite of passage: realizing that the little white dots in your child’s hair are not from dandruff. It’s an entomophobe’s worst nightmare, presaging hours of special shampoo rinses and painstaking perusal of hair with a special comb while repeating “gotta catch ‘em all!” like a manic Pokémon trainer.
But much like the eggs of the gross hair bugs, Net Investment Income Taxes (NIITs) keep popping up where they don’t belong. Whether spelled with one “i” or two, NIITs have as much place in your state’s tax code as they do in your child’s hair.
If you work in state policy and are unfamiliar with the NIIT, that’s understandable—until very recently, it was only relevant at the federal level. Passed into law by Congress as an amendment to the Affordable Care Act in 2010, the federal-level NIIT is a 3.8% tax on taxpayers with modified AGI (AGI with certain foreign income exclusions added back) above $200,000 for single filers, and $250,000 for married couples filing jointly (MFJ) (not inflation-adjusted).
Taxpayers above these thresholds must pay 3.8% of either their modified AGI over the income thresholds, or their net investment income, whichever is smaller. “Net investment income” includes net capital gains from the sale of investment assets such as stocks or bonds, stock dividends, royalties, rental income, and more. Capital gains from home sales are also included if it is not a primary residence or if the gain exceeds the thresholds for primary residences ($250,000 single/$500,000 MFJ).
NIITs remained a federal phenomenon until 2023, when Minnesota passed the first state-level NIIT into law. Minnesota’s NIIT was a 1% surtax on the federal-level NIIT, though the state set a much higher $1 million threshold before it applied.
2026 has been the year of the NIIT, though. NTUF previously testified in Vermont on a proposal to not only raise the top income tax rate to 13.3%, but also to introduce a 4% Vermont-level NIIT at income thresholds of $125,000 single/$250,000 MFJ. In keeping with Virginia legislators’ ongoing quest to propose increasing or creating every type of tax in existence in one year, the state’s H.B. 378 would have created a 3.8% Virginia NIIT on all taxpayers with AGIs above $500,000.
The closest that a NIIT has come this year, however, was in DC, where Councilmember Brianne Nadeau pushed to have a NIIT included in the District’s budget. Full details of her proposal were not released, but she referenced a report by the DC Fiscal Policy Institute proposing a 2–5% DC-level NIIT at the federal thresholds of $200,000 single/$250,000 MFJ. NTUF quickly responded by releasing an analysis criticizing this potential proposal.
Why NIITs Are a No-No
In each of these states, NIITs have been sold as an easy way to raise revenue by targeting the wealthy. But despite that narrative, these proposals would mostly target taxpayers who are far from the ultra-wealthy yacht owners a “tax the rich” enthusiast might envision.
In DC, for example, the median family with at least one child earns more than the $250,000 NIIT threshold. The vast majority of DC taxpayers subject to the federal NIIT (90.5%) earned under $1 million, and 71.4% earned under $500,000.
In the decade and a half since the NIIT was passed into law, inflation has rapidly increased the number of taxpayers subject to the tax. When the NIIT was signed into law in March 2010, $250,000 was equivalent to about $385,000 in 2026 dollars. In the decade after the NIIT went into effect in 2013, the number of taxpayers subject to the NIIT more than doubled from 3.1 million to 7.1 million.
But a higher threshold wouldn’t erase the NIIT’s problems, either. A basic tax policy principle is that when you tax something, you get less of it. With that in mind, investment is one of the worst things to target for a special tax.
Investment capital is very easy to spook with ill-considered taxes. Not only would a NIIT immediately make investments more expensive in the state imposing it, it would also signal that the state views investments as an easy target for future tax increases.
One last point: NIITs affect renters as well, specifically renters who rent from individual (small) landlords. Rental income is included in net investment income, but only for individuals. Increased taxes on landlords get passed down to their tenants in the form of higher rents.
States considering NIITs to raise revenue should look elsewhere. And make sure to check their hair one more time to be safe.
Bonus: Exclusive Footage of Pennsylvania House Passing Maryland-Style Digital Ad Tax Bill
