State experimentation with wealth taxes.

The idea of ​​a wealth tax as a panacea for federal and state budget deficits has been around since at least the 1930s. Recently, the use of wealth as a source of tax revenue has intensified. As of the 2020 presidential campaign, Senator Bernie sandersSenator Elizabeth Burrow and others raised the idea of ​​a federal estate tax. This wasn’t just rhetoric for an election, shortly after the election Senators Sanders and Warren released separate bills. However, none of the standalone bills or another version of a specific estate tax ended up in final budget legislation like the Build Back Better Act or the Cut Inflation Act.

Although a wealth tax did not end up in final legislation, things turned around briefly in late 2021 when Senator Wyden proposed a “Billionaires Income Tax” to close the budget gap during the Build Back Better Act negotiation. Although the proposal gained very little traction and was quickly abandoned, it was one of the first times that an estate tax became major legislation. Whether one believes that a federal estate tax is viable, in addition to the estate tax, remains up for debate. Many argue against a wealth tax on the grounds that its effects on income and behavior are largely unknown, as well as having challenges with design and implementation. It is very likely that all of the above will need to be resolved and tested.

So where would one go to test various estate tax proposals for implementation, reaction, behavioral changes and the like? Well, what 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 valiant state can, if its citizens so choose, serve as a laboratory; and try new social and economic experiments without risk to the rest of the country”. New State Ice Co. v. Liebmann285 US 262, 311 (1932).

We have our first statewide test as Massachusetts voters last year approved by a narrow 52% margin of an amendment to the state constitution titled the “Fair Share Amendment.” This new 4% tax applies to annual income over $1 million, in addition to the 5% state income tax. Although the tax affects approximately 0.6% of households, is a significant change in policy. So, we’ll see how elastic the tax is politics is. Will people actively leave Massachusetts? Will the economy shrink by nearly $6 billion because of the tax burden, as the Tax Foundation claims? believe?

Well, it was quite interesting when legislators from 7 states proposed various forms of estate taxes, in some cases simply proposing to raise rates for high earners on the same day in January 2023. Since then, a couple more legislators in other states they have done something similar. proposals. All of these proposals aim to raise revenue to finance specific social programs. I’ll briefly cover the proposals (or descriptions for those without actual legislative language). So let’s talk about what these proposals mean going forward.

group of seven

California: AB 259 he would eventually impose a two-tiered wealth tax. For tax years 2024 and 2025, the bill would impose a 1.5% annual tax on worldwide net worth exceeding $1 billion. In 2026, the bill would implement the two-tier tax. It would lower the worldwide net worth threshold to $50 million and impose a 1% annual tax. If a taxpayer’s worldwide net worth exceeds $1 billion, the tax rate increases to 1.5%. Finally, if a California resident established permanent residence in another state, the tax would continue to apply to the former resident for the next four years on an installment basis.

Connecticut: SB 351 would impose a 5% surtax on capital gains, dividends, and interest income for taxpayers who are subject to Connecticut’s highest tax rate (6.99%). The bill would impose higher tax rates on taxpayers with Connecticut taxable income greater than $1 million (9.55%), $10 million (10.25%), and $25 million (10.65%).

Hawaii: SB 358 would eliminate Hawaii’s prime 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 prime rate for capital gains. SB 345 would repeal the estate tax exemption granted to nonresidents for property with a Hawaiian 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 the financial assets as if they had been sold at the end of each year (ie, adjusted annually to market), taxing 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 higher tax rate on certain capital gain income. Another bill yet to be introduced (by Del. Jheanelle K. Wilkins) would lower the estate exemption from the current threshold of $5 million to $1 million.

NY: SB 1570 would impose market value treatment on capital gain income from individuals with net assets of $1B or more. A yet-to-be-introduced bill (by Senator Gustavo Rivera) would impose an additional tax of up to 15% on capital gains income, in addition to regular state (and New York City (NYC)) income tax. ) existing rate (up to 10.9% (State), 3.876 (NYC)).

Washington: HB 1473 Eliminate the property tax exemption 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 in excess of $250 million.

recent addition

Oregon: HB 2672 I would add a 13% tax bracket for income over $500k.

Conclution

It seems that we are seeing a clear trend of using wealth taxes to increase revenue. As more data on “wealth inequality” is released, people like Nobel Prize-winning Keynesian economist Joseph Stiglitz are advocating a can tax. And coverage of the issue is not waning in the popular press, as revenue is needed to bridge the spending shortfall. 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 for “millionaires” enacted in Massachusetts and the tax on mansions passed by voters in Los Angeles County. So these various proposals are worth keeping an eye on, especially if any of them work, because a federal version could be next.

Opinions 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.