A federal tax break designed to encourage investment in small, early-stage companies is facing a growing backlash from state governments, with Maine and Oregon the latest to decouple from the provision. The qualified small business stock (QSBS) exclusion, expanded under the One Big Beautiful Bill Act (OBBBA) signed into law in 2025, now allows investors to exclude up to $15 million in capital gains from the sale of qualifying C-corporation stock, up from the previous $10 million ceiling. The gross asset threshold for qualifying companies also rose from $50 million to $75 million for stock issued on or after July 4, 2025.
Maine and Oregon enacted legislation last month requiring investors to pay state income tax on gains that qualify for the federal exclusion. Oregon's law takes effect for tax year 2026 and is projected to protect $39 million in state revenue in the current budget cycle, rising to $83 million by 2029–2031. Maine's legislation applies to investments made after July 3, 2025, and is estimated to eventually shield $7.3 million in annual state tax revenue, with funds earmarked for expanded earned income tax credits and school funding.
The moves bring to six the number of states that have decoupled from the federal QSBS exclusion: Alabama, California, Maine, Mississippi, Oregon, and Pennsylvania. A bid by the District of Columbia Council to follow suit was blocked by Congress, while efforts in New York and Washington state did not advance. The patchwork of state rules is creating new complexity for financial advisors working with entrepreneurial clients, founders, and early-stage investors, particularly those with multi-state residency or trusts.
The QSBS exclusion, introduced in 1993 during the Clinton administration, was intended to spur investment in small, early-stage companies. However, research published last year by the Treasury Department found that taxpayers earning more than $1 million account for nearly 75% of the gains excluded. The Tax Foundation cited a Joint Committee on Taxation estimate that the OBBBA expansion will cost an additional $17.2 billion over the 2025–2034 period, on top of the $44.5 billion the exclusion was already projected to cost under prior law.
Critics argue the exclusion distorts business structure decisions by favoring C corporations over LLCs and S-corps, which are more commonly used by small businesses. The Tax Foundation also flagged that the gross asset test can lead companies to artificially delay expansion to allow investors to snap up eligible shares, prioritizing tax benefits over optimal returns. During Oregon's legislative debate, Daniel Hauser of the Oregon Center for Public Policy argued that a Portland-based venture capitalist investing in a California or New York startup could claim the Oregon QSBS tax break even if the investment produced no economic benefit to Oregon.
For advisors, the evolving state landscape is adding urgency to residency and trust planning conversations. Attorney Steve Oshins told CNBC that clients with multi-state residency have options, including the use of incomplete non-grantor trusts established in favorable jurisdictions such as Nevada, Delaware, or Wyoming, where trust income is not taxed. A resident of Oregon, for example, could transfer shares to such a trust, provided the trust is not administered in Oregon and none of its trustees live there, to shield gains from state income tax. However, Maine's rules are stricter, subjecting non-grantor trusts to state income tax if funded by a Maine resident or created under a Maine resident's will.
The most direct solution, lawyers say, is relocation, though that comes with its own complications. David Blum, partner and chair of Akerman's national tax practice group, noted that clients cannot simply update voter registration and spend 183 days out of state. "When it comes to changing residency and your domicile, you really have to move and uproot your life," he told CNBC. For high-net-worth clients with substantial exits on the horizon, the decision to relocate may involve weighing state tax savings against personal and professional ties.
The backlash against QSBS reflects a wider debate about who the incentive actually serves. As state revenue offices take notice of the growing cost of the exclusion, advisors should be prepared to discuss the implications with clients, particularly those in states that have decoupled. For more on how tax policy shifts are affecting advisor strategies, see our coverage of Western Alternative Strategies CIO Warns Advisors Overpay for Volatility Hedging, Underprepare for Tail Risks and Morgan Stanley survey: 63% of founders prioritize revenue growth amid AI and liquidity pressures.
