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State Efforts to "Tax the Rich"

By: William L. Bricker, Jr., Linda Galler & Adam Margulies

Lawmakers in at least eight states – California, Connecticut, Hawaii, Illinois, Maryland, Minnesota, New York and Washington[1] – have proposed wealth tax legislation. While some of these proposals rely on traditional means of raising revenue (for example, increasing capital gains tax rates)[2], proposed legislation in New York and California break new ground, by adopting a “mark-to-market” approach that would tax accrued but unrealized gains on all assets.

Similar wealth taxes have been proposed (and re-proposed) at the federal level with different labels ranging from a wealth tax to a so-called “billionaire tax.” For example, in the 2020 Democratic presidential primary, Senators Bernie Sanders and Elizabeth Warren proposed an annual federal wealth tax. Since that time, scholars and commentators have raised questions and highlighted several issues in response, including whether a wealth tax is constitutional and the potential difficulties with implementing and administering a wealth tax.

Taxing unrealized gains at the state level would raise a number of similar, practical issues for taxpayers. For example, how would an interest in a closely held business be valued? Would costly annual appraisals be required? Owners of start-up businesses could face additional challenges. Fluctuating values could result in owners being taxed on estimated values that never actually materialize, and possibly result in tax credits for subsequent years that have limited, if any, value. How would the tax treat assets held in trust, in particular, where a beneficiary was not in control of distributions? These pragmatic questions, and many others, have yet to be answered.

On a broader level, there is the issue of whether a wealth tax, particularly on unrealized gains, would trigger an exodus of wealthy individuals and business owners from a state. The prospect is real, evidenced by individuals and businesses having relocated in recent years from high tax states to states with more favorable tax systems. For example, in 2021 San Francisco-based private equity firm Thoma Bravo opened an office in Florida and has continued to expand its presence there. Orlando Bravo, one of the two co-founders, also abandoned California for Florida. Similarly, in 2022, Ken Griffin, billionaire founder of hedge fund Citadel LLC, left Illinois for Florida, moving Citadel’s headquarters there, as well. The same year, Elon Musk relocated his residence from California to Texas.[3] It is notable that neither Florida nor Texas impose an estate, income, or wealth tax on individuals.[4]

California lawmakers apparently anticipated that their taxing policies would result in an exodus. Their response was an exit tax on those leaving the state with worldwide net worth in excess of $30 million. The proposed California exit tax is sweeping applying to an individual global net worth. Exit taxes already exist at the federal level, in the case of expatriating US citizens and permanent residents. Although the rules are complex, liability is generally based on gains accrued on an individual’s worldwide property at the time of expatriation (even though such gains were not actually realized through sales). State exit taxes would be calculated in roughly the same way. A state exit tax would raise numerous issues including whether they violate the federal Commerce Clause.

States that have proposed wealth tax legislation could be facing internal uphill battles. For example, California Assemblymember Jacqui Irwin, who chairs the California Assembly Committee on Revenue and Taxation, recently asserted that prospects for the state’s wealth tax proposal are the same as they were last year, when a similar bill died without receiving even an initial hearing in committee. Notably, Assemblymember Irwin’s main concern is that the bill would drive wealthy people out of California, where the state’s progressive income tax system already heavily relies on revenue from taxing their incomes.[5] In addition, the governors of both New York and California appear to currently oppose the idea of implementing new wealth tax measures in their respective states.[6]

Nevertheless, a coordinated effort among states to implement wealth and exit taxes could have far reaching effects. The details and progress of the various proposals should be monitored accordingly.

[1] Seven of the eight states proposed legislation on the same day, January 26, 2023. Several days earlier, Minnesota proposed a state wealth tax. [2] In fact, effective January 1, 2022, Washington also enacted a 7% capital gains excess tax. [3] Interestingly, California’s 2022 projected $97.5 billion budget surplus became a significant budget deficit, in excess of $25 billion when its tax revenue fell. [4] Recognizing this risk, legislators in several states are working together to combat outmigration. According to Illinois state Rep. Will Guzzardi, “that’s part of why we are working as a multistate coalition.” Tax-the-Rich Blue States Want to Leave Wealthy ‘Nowhere to Hide’, Daily Tax Report (Jan. 19, 2023). [5] California Wealth Tax Proposal Likely to Stall in Legislature, Bloomberg Tax (Feb. 2, 2023). [6] “New York’s Governor Kathy Hochul last month said she did not think raising taxes ‘makes sense’ after the state passed tax cuts, primarily aimed at the middle class, last year.” Tax the rich, urge protesters at New York City’s ‘Towers of Power’, The Guardian (Jan. 19, 2023). “California’s Governor Gavin Newsom campaigned against efforts to increase taxes on the rich; his opposition helped sink a 2022 ballot initiative that would have raised taxes on the rich to pay for electric vehicle charging stations and wildfire prevention.” Tax the rich? Liberals renew push for state wealth taxes, AP News (Jan. 20, 2023).


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