An Analysis of House Bill 378 and Its Implications for High-Income Taxpayers
By Jessica I. Marschall, CPA, ISA AM
January 2026
Introduction
Virginia House Bill 378, introduced on January 12, 2026, by Delegate Elizabeth Bennett-Parker (D-5), represents a significant departure from the Commonwealth’s historical approach to taxing investment income. If enacted, the legislation would establish a new Net Investment Income Tax (NIIT) beginning with the 2027 taxable year, potentially creating a substantial additional tax burden for Virginia’s highest earners.
This article examines the key provisions of HB 378, analyzes its potential impact on affected taxpayers, and places the proposal within the broader context of state income tax trends across the nation.
Key Provisions of House Bill 378
The proposed legislation imposes a tax equal to 3.8 percent of a taxpayer’s net investment income. This rate mirrors the federal Net Investment Income Tax established under the Affordable Care Act, though Virginia’s version operates independently with its own threshold structure.
The tax applies to the lesser of (1) the individual’s or estate’s or trust’s net investment income, or (2) the amount by which their federal modified adjusted gross income (MAGI) exceeds $500,000. This threshold structure means that taxpayers with MAGI below $500,000 would owe no additional tax regardless of their investment income level.
For purposes of this tax, net investment income generally encompasses interest, dividends, capital gains, rental and royalty income, and income from passive business activities. This definition closely tracks the federal NIIT’s approach to categorizing investment income.
Effective Date and Projected Impact
While introduced during the 2026 legislative session, the tax would take effect for taxable years beginning on or after January 1, 2027. This delayed implementation provides affected taxpayers time to engage in tax planning and, where appropriate, restructure their investment holdings.
The practical effect for high-income Virginians with substantial investment portfolios is significant. When combined with Virginia’s existing top marginal income tax rate of 5.75%, the proposed NIIT would effectively raise the state’s top marginal rate on investment income to 9.55%. This increase positions Virginia substantially above many of its regional competitors in terms of tax burden on passive income.
Legislative Context and Political Landscape
HB 378 has been referred to the House Committee on Finance, where it faces an uncertain path forward. Proponents of the measure, largely within the Democratic-led legislature, characterize the bill as a mechanism to generate revenue from Virginia’s wealthiest residents to fund critical public services. They argue that investment income has historically been undertaxed relative to earned income and that the proposal addresses this inequity.
Critics, however, contend that the bill positions Virginia as a “tax-hiking outlier” in a region where neighboring states are moving aggressively in the opposite direction. North Carolina continues its phased reduction toward a 2.49% flat rate, while West Virginia has been systematically reducing its income tax burden. These critics argue that Virginia risks losing high-income residents and the economic activity they generate to lower-tax jurisdictions.
State Income Tax Trends: A National Perspective
Virginia’s proposed tax increase stands in stark contrast to broader national trends. As of January 1, 2026, at least 43 states implemented notable changes to their income tax structures, with the overwhelming majority continuing a multi-year movement toward lower, flatter tax systems. The following table summarizes key individual income tax changes that took effect at the beginning of 2026:
| State | 2025 Rate | 2026 Rate | Type of Change |
| Georgia | 5.19% | 5.09% | Flat rate reduction as part of a multi-year phase-down |
| Indiana | 3.00% | 2.95% | Flat rate reduction; slated to drop to 2.9% in 2027 |
| Iowa | Graduated | 3.90% | Completed transition to a single flat-rate system |
| Kentucky | 4.00% | 3.50% | Flat rate reduction triggered by state revenue benchmarks |
| Mississippi | 4.40% | 4.00% | Final round of a multi-year scheduled flat rate reduction |
| Montana | 5.90% | 5.65% | Reduction of the top marginal tax rate |
| Nebraska | 5.20% | 4.55% | Reduction of the top marginal rate |
| North Carolina | 4.25% | 3.99% | Flat rate reduction; continuing toward a 2.49% goal |
| Ohio | 3.125% | 2.75% | Transitioned to flat-rate tax for income over $26,050 |
| Oklahoma | 4.75% | 4.50% | Reduction of top marginal rate and bracket consolidation |
These reductions reflect a competitive dynamic among states seeking to attract high-income residents, entrepreneurs, and businesses. Virginia’s proposed move in the opposite direction may place the Commonwealth at a competitive disadvantage in this regard.
Additional Noteworthy State Tax Developments for 2026
Beyond rate changes, several states have implemented structural modifications to their income tax systems that merit attention.
Arizona has revised its approach to veteran-related income, now excluding most such income sources from eligibility calculations for property and income tax exemptions.
California increased its standard deductions to $5,706 for single filers and $11,412 for married taxpayers filing jointly, providing modest relief for lower- and middle-income residents.
Illinois took the notable step of decoupling from federal 100% bonus depreciation while simultaneously increasing its personal exemption to $2,925.
Michigan expanded exemptions for retirement income, a change that may effectively eliminate state income tax liability on many pension distributions for qualified residents.
West Virginia completed its multi-year phase-out of state income taxes on Social Security benefits, providing significant relief to retirees who depend on these payments as a primary income source.
Planning Considerations for Virginia Taxpayers
Should HB 378 advance through the legislative process, high-income Virginia taxpayers should consider several planning strategies. These may include accelerating the recognition of capital gains into 2026 before the tax takes effect, evaluating whether passive business activities might be restructured to generate non-passive income, and assessing the potential benefits of charitable giving strategies that reduce net investment income.
Additionally, taxpayers near the $500,000 MAGI threshold should monitor their income levels carefully, as strategic timing of income recognition could help manage exposure to the proposed tax.
Conclusion
Virginia House Bill 378 represents a significant potential change to the Commonwealth’s tax landscape. While the bill’s ultimate fate remains uncertain, its introduction signals an important policy debate about how Virginia should position itself relative to its regional competitors and whether investment income should bear a higher tax burden than it currently does.
Taxpayers and their advisors should monitor the bill’s progress through the legislative process and begin preliminary planning discussions should the proposal gain momentum. As always, consultation with qualified tax professionals is advisable before implementing any specific strategies in response to proposed legislation.
Sources
Kiplinger, “2026 State Tax Changes”
Tax Foundation, “2026 State Tax Changes Taking Effect”
CBS News, “9 States Cutting Income Taxes in 2026”
Virginia Legislative Information System (LIS), HB 378
Americans for Tax Reform, Virginia Tax Analysis
