The idea of a wealth tax as a panacea for budgetary shortfalls at the federal and state levels has been around since at least the 1930s. Recently, using wealth as a source of tax revenues has heated up. Starting with the 2020 Presidential campaign, Senator Bernie Sanders, Senator Elizabeth Warren and others floated the idea of a wealth tax at the federal level. This was not just rhetoric for an election, shortly after the election Senators Sanders and Warren published stand-alone bills. However, none of the stand-alone bills or another version of a targeted wealth tax ended up in any final budgetary legislation like the Build Back Better Act or the Inflation Reduction Act.
Although a wealth tax did not end up in final legislation, things changed briefly in late 2021 when Senator Wyden proposed a “Billionaires Income Tax” to bridge the budget gap during the negotiation of the Build Back Better Act. Although the proposal gained very little traction and was quickly abandoned, it was one of the first times a wealth tax made it into major legislation. Whether one believes that a federal wealth tax is viable, over and above the estate tax, continues to be up for debate. Many argue against a wealth tax on the grounds that its effects on revenues and behavior are largely unknown, in addition to have challenges with design and implementation. All of the foregoing would most likely need to be worked out and tested.
So where would one go to test various wealth tax proposals for implementation, reaction, behavioral changes and the like? Well, how about the states? After all, in 1932, Supreme Court Justice Louis Brandeis wrote, “It is one of the happy incidents of the federal system that a single courageous state may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country.” New State Ice Co. v. Liebmann, 285 U.S. 262, 311 (1932).
We have our first test at the state level as last year Massachusetts voters by a narrow 52% margin approved an amendment to the state’s constitution titled the “Fair Share Amendment.” This new 4% tax applies to annual income over $1M, in addition to the 5% state income tax. Although the tax affects approximately 0.6% of households, it is a significant shift in policy. So, we will see just how elastic tax policy is. Will people actively leave Massachusetts? Will the economy shrink by almost $6B because of the tax drag, as the Tax Foundation believes?
Well, it was rather interesting when legislators from 7 states proposed various forms of wealth taxes, in some cases simply proposing increasing the rates on high income earners on the same day in January 2023. An additional couple of legislators in other states have since made similar proposals. All of these proposals have the goal of raising revenue to fund specific social programs. I’ll briefly cover the proposals (or descriptions for those without actual legislative language). Then let’s talk about what these proposals mean going forward.
Group of Seven
California: A.B. 259 would eventually impose a two-tier wealth tax. For tax years 2024 and 2025, the bill would impose an annual tax of 1.5% on worldwide net worth exceeding $1B. In 2026, the bill would implement the two-tier tax. It would reduce the worldwide net worth threshold to $50M and impose a 1% annual tax. If a taxpayer’s worldwide net worth exceeds $1B, the tax rate rises to 1.5%. Finally, if a California resident permanently established residence in another state, the tax would continue to apply to the former resident for the next four years on a fractional basis.
Connecticut: S.B. 351 would impose a 5% surtax on capital gains, dividends and interest income of taxpayers who are subject to Connecticut’s highest income tax rate (6.99%). The bill would impose higher tax rates on taxpayers with Connecticut taxable income over $1M (9.55%), $10M (10.25%) and $25M (10.65%).
Hawaii: S.B. 358 would eliminate Hawaii’s preferential rates for capital gains (maximum 7.25%) and tax them at ordinary income tax rates (up to 11%). Hawaii is one of the few states that currently has a preferential rate for capital gains. S.B. 345 would repeal the estate tax exemption granted to nonresidents for property with a Hawaii situs (using the definition of “situs” as applied for federal estate tax purposes).
Illinois: A yet-to-be introduced bill (by Rep. Will Guzzardi) would require taxpayers with financial assets of $1B or more to recognize unrealized capital gains by treating financial assets as if they were sold at the end of each year (i.e., annually marked to market), taxing the unrealized gains as Illinois income (at 4.95%).
Maryland: A yet-to-be introduced bill (by Del. Julie Palakovich) would impose an additional 1% tax on top of the highest income tax rate on certain capital gains income. Another yet-to-be introduced bill (by Del. Jheanelle K. Wilkins) would lower the inheritance exemption from the current $5M threshold to $1M.
New York: S.B. 1570 would impose mark-to-market treatment on capital gains income of individuals with net assets of $1B or more. A yet-to-be introduced bill (by Sen. Gustavo Rivera), would impose an additional tax of up to 15% on capital gains income, atop the existing state (and in New York City (NYC), local) ordinary income tax rate (up to 10.9% (state), 3.876 (NYC)).
Washington: H.B. 1473 would remove the exemption from property tax on certain financial intangible assets (such as stocks and bonds, publicly traded options, and futures contracts) and impose a 1% tax on the value of financial intangible tangible assets exceeding $250M.
Oregon: H.B. 2672 would add a 13% tax bracket for income over $500k.
It seems like we are observing a clear trend of using wealth taxes to raise revenues. As more data is published on “wealth inequality,” people, like Nobel prize-winning Keynesian economist Joseph Stiglitz, are advocating for a wealth tax. And coverage of the subject is not diminishing in the popular press, as revenues are needed to bridge spending shortfalls. Is the future higher wealth taxes?
If California is any guide, these proposals are unlikely to pass – for now. However, taxpayers could see more of these tax proposals in the future. Two versions have already passed: the surtax on “millionaires” enacted in Massachusetts and the mansion tax approved by voters in Los Angeles county. So, it is worth keeping an eye on these various proposals especially if any work because a federal version could be next.
The views expressed are those of the author and do not necessarily reflect the views of Ernst & Young LLP or any other member firm of the global Ernst & Young organization.