Left-leaning proponents of taxing the assets held by America’s billionaires have a new target: In lieu of a federal wealth tax, state lawmakers want to tax billionaires where they live, in states like California, Washington and New York.
“The point here is to make sure we do at the state level what is not being done at the federal level,” said Gustavo Rivera (D), a New York state senator who is part of the seven-state group.
Some of the state bills resemble the “wealth tax” that Sen. Elizabeth Warren (D-Mass.) pitched during her 2020 presidential candidacy. It’s a form of taxation never before attempted in the United States, in which very wealthy people would have to pay taxes annually on assets that they own, rather than just their income that year. Other bills focus on raising money from more conventional forms of taxation, including capital gains taxes and estate taxes.
The state legislators say they would like to try such ideas as a test case for future national policy while acting collectively to minimize the threat of people moving to a nearby lower-tax state.
“States are the labs of innovation,” said Noel Frame (D), a state senator in Washington. “But taxes are different. This is why we are all here together.”
No longer will states “get pitted against each other,” she added.
Sponsors told The Washington Post that they will introduce their bills on Thursday in California, Connecticut, Hawaii, Illinois, Maryland, New York and Washington, and shared the text of their draft bills.
Recent history suggests that more conventional taxes, like a Connecticut proposal to create new tax brackets for the rich, may stand a better chance of passage than untested wealth taxes. In Washington’s last legislative session, for example, a wealth tax bill sponsored by 12 of the state’s 49 senators failed to advance, while an increase in the state’s capital gains tax did pass, but has run into a court challenge. A California wealth tax similar to the one that Alex Lee (D) plans to reintroduce this week was sponsored by just five of the 80 state Assembly members last year.
Skeptics of wealth taxes, for their part, say the idea might be even worse on a state level than a national level, since the rich can easily move to another state.
“High net-worth individuals are fairly mobile, and it is much easier to change residency to another state than it is to leave the country,” said Jared Walczak, who works on state tax policy at the right-leaning Tax Foundation.
Walczak points out that California’s wealth-tax proposal — which would stay in effect for some years after a resident moves out of state — would almost certainly be challenged in court. And more generally, any wealth tax that generates revenue from a small pool of the state’s richest people can easily unravel if just one or a few very rich people decide to move, he argues.
In addition, he says, assessing the value of a person’s wealth would be challenging for state bureaucrats and sometimes lead to unfair results, as in the case of Silicon Valley founders, whose companies may have huge valuations on paper that are hard to assess or tax in a straightforward way.
“Just because a company might sell for hundreds of millions of dollars in the future doesn’t mean that its current owners have any significant wealth,” Walczak said. The on-paper net worth of billionaires fluctuates drastically as companies’ stock prices or valuations rise and fall, making it hard to figure out how much they should pay if taxed on that wealth, he added.
But Frame, the Washington lawmaker, argues that billionaires should still be taxed on such holdings even if they don’t actually have the money in their bank accounts. After all, property taxes go up when the homes are assessed for a higher value, even if residents don’t actually see that money without selling the house, she notes.
Emmanuel Saez, a Berkeley economist who helped design Warren’s wealth tax proposal, said state lawmakers started contacting him to ask how they could impose a similar tax in their states during the 2020 presidential campaign. He helped draft the variations on a wealth tax that are set to be proposed this week in California, New York and Washington.
He has no objection to a tax that might compel rich people to sell stocks or other assets, he said. In the case of the California proposal, which would impose a 1.5 percent tax above $1 billion in assets, “you would sell 1.5 percent of your stock and you pay the tax,” he said. “If it’s an annual wealth tax, it’s taking a fraction of your wealth every year. Almost by definition, you’re going to have less wealth after you pay the tax.”
A fresh look at capital gains
In four states — the three that drafted bills with Saez’s involvement, along with Illinois — lawmakers say they will float versions of a tax on wealthy people’s holdings, or so-called “mark-to-market” taxes on their unrealized capital gains. But other states will pitch more conventional tax proposals.
Connecticut lawmakers, for example, will consider raising income taxes on high earners, as the District of Columbia and New York have done in recent years.
Connecticut, Hawaii, Maryland and New York lawmakers, meanwhile, are proposing a change based on some Democrats’ frustration with national tax policy. The federal government taxes capital gains — the income that a person makes from selling a stock or similar asset — at a separate rate from other income. The highest earners pay a 20 percent tax on capital gains while paying a 37 percent tax on wages — a disparity that some Democrats want to close.
If federal rates on capital gains are lower, state rates on capital gains should be higher, these lawmakers argue.
A draft of Rivera’s New York bill, shared with The Washington Post, indicates that 19 of the state’s 63 incoming senators have signed onto a proposal that would tack on an extra 7.5 percent tax on capital gains for New York married couples with income above $550,000, and 15 percent for couples with income above $1.1 million.
In Maryland, Del. Julie Palakovich Carr (D-Montgomery) will propose an extra 1 percent tax on top of the state income tax rate on certain capital gains. “On a gut level, people realize that working for your money is not the same as passively getting income,” she said.
And in Hawaii, Maryland and New York, bills will propose a measure that would affect more significantly a middle tier of rich people, not just the ultrarich: lowering the exemption cutoff for the estate tax. In Maryland’s case, families would owe taxes on inheritances over $1 million rather than $5 million, as is the case today.
Del. Jheanelle K. Wilkins (D-Montgomery), who has proposed such a bill unsuccessfully before, said she hopes the idea will gain more favor since the pandemic exposed inequality between the rich and poor. “That’s quite a bit of funds that we’re leaving on the table,” she said.