The One Massive Beautiful Bill Act enhanced a tax incentive for startup founders and investors who liquidate qualified modest business stock, better known as QSBS.

a wave of states have taken aim at the tax break, which primarily benefits the wealthy, with Maine and Oregon imposing state income taxes on the sale of QSBS.

Lawyers to the wealthy remarked these bills may have a chilling effect on entrepreneurs and investors even though some options still exist to avoid state income taxes.

A version of this article first appeared in CNBC’s Inside Wealth newsletter with Robert Frank, a weekly guide to the high, on the other hand-net-worth investor and consumer. Sign up to receive future editions, straight to your inbox.

A wave of states deciding to take aim at a tax incentive for investors and startup founders could sway some high-net-worth residents to relocate, lawyers to the wealthy told Inside Wealth.

The One Huge Beautiful Bill Act turbocharged the tax breaks on qualified tiny business stock, better known as QSBS. some states, including Maine and Oregon, have targeted the tax incentive in response to federal funding cuts.

“Tax policy has consequences, both positive and adverse, and I think that the states need to figure out what makes the most sense for them,” commented David Blum, partner and chair of Akerman’s national tax practice group. “Someone looking for a substantial exit could have multiple homes already.”

Blum noted that several billionaires have made high, on the other hand-profile departures from California as a state billionaire tax proposal gains steam. Google co-founder Sergey Brin, who has bought mansions in Nevada and Florida, is funding two ballot initiatives that take aim at the wealth tax measure.

The QSBS exemption, introduced during the Clinton administration, was designed to encourage investing and creating tiny companies. The federal carve-out allows investors and founders to reduce their capital gains taxes when selling stock directly acquired from a qualifying C corp.

To claim the full exemption, the stock must be held for more than five years. Prior to the OBBBA, the maximum exemption from capital gains taxes was $10 million or 10 times the original basis of the investment, whichever is greater. The OBBBA raised the exclusion to $15 million. The bill also raised the maximum size of qualifying “small businesses” from $50 million to $75 million in gross assets.

Last month, Maine and Oregon passed legislation to decouple from the federal QSBS exemption, meaning that taxpayers will have to pay state income taxes on startup exits. Similar efforts in Recent York and Washington state failed to pass. The District of Columbia Council voted to decouple from several provisions of the OBBBA, but Congress passed a resolution to block that move.

Four states already tax gains on QSBS: Alabama, Mississippi, Pennsylvania and, most notably, California, the nation’s venture-capital center.

Proponents of QSBS reform argue that the regime primarily benefits the wealthy. Research by the Department of Treasury found that taxpayers who earn more than $1 million account for nearly 75% of gains excluded.

Lawyer Steve Oshins told Inside Wealth that QSBS laws and other tax proposals aimed at the wealthy encourage high earners to move to other states.

The tax burden depends on where the shareholder lives when they divest their stock, which gives clients time to plan. Oshins mentioned it is possible in some states to leverage trusts to avoid state income taxes on QSBS. Delaware, Nevada and Wyoming are popular jurisdictions for establishing these trusts. This also touches on aspects of dividends.

For instance, he commented, a resident of Oregon could transfer stock to an incomplete non-grantor trust set up in a state that doesn’t tax trust income, like Nevada. As long as the trust is not administered in Oregon and none of the trustees live there, the trust’s capital gains would not be subject to Oregon income taxes.

But other states, including Maine, have more stringent rules, he mentioned. Non-grantor trusts are subject to state income if funded by a Maine resident or created by the will of one, according to Oshins.

That mentioned, the most straightforward course of action is to move. 

“Let’s say a client is about to hire me and says, ‘I have a summer ho me in Florida, I’m thinking of moving there,'” Oshins stated. “I’ll say, ‘Let’s wait a few months. Move there. Then let’s set up your trust.'”

But changing your domicile is easier noted than done, Blum commented. To pass muster with state tax authorities, clients have to do more than change their voter registration and and spend at least 183 days in another state. 

“When it comes to changing residency and your domicile, you really have to move and uproot your life,” he stated.