Prospects for a federal wealth tax could be nil in the Trump era, but states – specifically blue states – may be tempted to take up that cause, demonstrating the devastating effect that policy would have on citizens, businesses and the economy.
Massachusetts went first, adopting a “millionaire tax” in 2022 that imposes a 4 percent surtax on taxable income over $1 million. State officials say the tax hauled in an impressive $1.8 billion in revenue as of May 2024. But the backlash may be coming.
Stephen Gerard Pagliuca, a wealthy private equity adviser and co-owner of the Boston Celtics, left Massachusetts the same month the tax went into effect.
“Generally, punitive tax measures will make it more attractive for higher earners, whether basketball players or not, to go to … lower tax states,” Pagliuca said after moving. While Pagliuca stopped short of saying he moved to avoid the millionaire tax, he relocated to Florida, one of the few states without any income taxes.
Similarly, former Boston Celtics power forward, Grant Williams, confirmed that he accepted a trade to the Dallas Mavericks largely to avoid paying the millionaire tax. Williams suggested that his $52 million contract had been whittled down to $48 million from the 4% wealth tax. “In Boston, it’s…$48 million with the millionaire’s tax, so $54 million in Dallas is really like $58 million in Boston,” Williams said.
Research by the Cato Institute shows that states with high income taxes often see an outmigration of residents to low tax states. Wealth taxes risk exacerbating this trend.
While Massachusetts is currently the only state with a true wealth tax, four additional states – California, New York, Minnesota, and Washington – have adopted quasi-wealth taxes. This is to say that these states have either raised their income taxes to target wealthy individuals (California and New York), imposed an excise tax on gains from capital assets (Washington), or taxed investment income surpassing $1 million (Minnesota).
Beyond the five states punishing wealthy residents, there are seven states actively considering legislation to adopt wealth taxes. These are Connecticut, Hawaii, Illinois, Maryland, Nevada, Pennsylvania, and Vermont.
We see that each of the 12 states that impose quasi-wealth taxes or are pursuing wealth taxes are heavily Democratic. Several of these states also possess the most progressive tax structures across multiple areas.
In Washington, outgoing Gov. Jay Inslee proposed a 1 percent tax on residents who make $100 million or more annually, despite his campaign promises to lower taxes. Inslee’s proposal aimed to close a multi-billion-dollar budget gap. Current Gov. Bob Ferguson indicated he would review Inslee’s proposal.
People may not remember this has been tried before.
Modern wealth taxes were first inspired by President Franklin Roosevelt’s 1935 Wealth Tax. The law levied up to 75 percent of household income in taxes for those making $5 million a year in order to fund New Deal-era social welfare programs.
Rather than pay the tax, rich citizens initially dodged it by using loopholes in the code. America’s rapid manufacturing during the second world war did far more to raise revenue than Roosevelt’s unpopular wealth tax.
If states decide to enact a wealth tax, predictable problems will follow.
Beyond draining the ultra-wealthy, a wealth tax would pose a special problem for people who inherit wealth or property. Certain farmers, ranchers, and inheritors of high-value land would struggle to pay taxes on their assets because they lack the ready cash.
Currently, inheritors of wealth benefit from a policy called “step up in basis,” which resets an inherited estate to fair market value upon the owner’s passing. Step up in basis allows for such assets to pass to new owners without triggering a tax at death.
Another problem a wealth tax would trigger is chasing away domestic investments, like rendering real estate less attractive to investors. That could further stagnate the housing market, discouraging risk-taking among certain real estate investors.
Still another threat posed by a wealth tax would be to alienate assets that lack mass-market demand, like antique collectables. Owners will be hard-pressed to assess for tax purposes the worth of rare items like vintage cars, sports memorabilia, and antiques that fluctuate in market value.
And what about untapped savings, such as pensions, trusts, and corporate shares? Could state-level tax collectors siphon value from those savings? People would lose out on their wealth before realizing its benefits.
It is possible that Congress could pass legislation that invalidates wealth taxes if more states successfully adopt them. Article I of the Constitution grants Congress the authority to levy taxes, which can also be used to restrict state taxes under its commerce clause power. And states themselves can take action to prevent this bad idea from passing. Texas citizens passed an amendment that prohibits any future wealth taxes in the state.
With stubborn inflation and housing woes, the last thing Americans need right now is a wealth tax, disincentivizing investment, chasing away domestic businesses to less-taxed nations, and destroying avenues for accumulating savings.
This article was originally published at www.thecentersquare.com
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