Wealth taxes are a hard sell in the states, but advocates continue to push forward with a wide range of proposals targeting capital gains, income, intangible assets, and net wealth.
Lawmakers in at least 12 states have proposed such bills, including in Connecticut, Hawaii, Maryland, Rhode Island, and Vermont. Some proposals have been shot down but others are still in play or advancing. Massachusetts has a millionaire's tax and New Mexico recently approved legislation reducing taxes on lower earners and restricting the capital gains tax deduction, proof that taxing the wealthy can be done.
But many states have been focused on cutting taxes in light of record revenue surpluses, which are partly due to inflation and one-time federal pandemic relief funds. Personal and corporate income tax rates have been cut in 26 states over the last three years, which could cost those states a cumulative $111 billion over the next five years, according to the Center on Budget and Policy Priorities.
Progressive tax policy advocates participating in a multistate campaign called the Tax Justice Initiative have high hopes that lawmakers and voters will begin favoring new policies to tax the wealthy as state surpluses run dry and revenue is needed to fund essential services.
The campaign, supported by the State Revenue Alliance and the State Innovation Exchange, was formally launched last year. It is backed by an array of grassroots campaigns working with progressive lawmakers to reform state tax regimes by raising taxes on the ultra-wealthy and using the revenue to fund public services like education. Members include the Connecticut For All coalition, the Hawaii Tax Fairness coalition, and the Invest in Our New York coalition.
“Raising revenue, even in progressive legislatures, is difficult,” said Amber Wallin, senior policy and outreach director at State Revenue Alliance. “That’s why we came together on this initiative," she told Tax Notes on February 12.
Although many of the proposals introduced by states participating in the initiative didn’t make it out of committee in 2023, and the 2024 bills may share the same fate, members are optimistic about the movement's longer-term prospects.
“Momentum for progressive revenue and tax campaigns has been building for several years as state-based leaders started to craft a vision for what they can collectively accomplish,” Wallin said. “Revenue has to be on the legislative table this year — it’s unavoidable for many states that are facing fiscal realities.”
Aidan Davis, state policy director at the Institute on Taxation and Economic Policy, told Tax Notes on March 13 that the policy case for wealth taxes is "incredibly strong."
But opponents of such taxes warn the policies will drive out higher earners, create administrative complications, and destabilize states’ revenue bases.
“Tax competition is real,” said Manish Bhatt, a senior tax policy analyst with the Tax Foundation. He emphasized that low-tax states tend to see more inbound migration. “When you place a state like Vermont or Massachusetts that’s trying to penalize certain income levels over others against a state like Texas, it’s clear that the states that are doing really well are competitive taxwise.”
In Texas, which doesn't have an individual income tax, taxpayers recently voted to amend the state constitution to prohibit the Legislature from imposing a tax based on the net worth or wealth of an individual or family.
Campaigning for More Revenue
Progressive tax advocates see Massachusetts's millionaire's tax, a 4 percent surtax on taxable income over $1 million that was enacted via ballot measure in 2022, as proof that taxing the wealthy can be done. Lawmakers in neighboring Rhode Island and Vermont have proposed similar taxes.
Rhode Island House Finance Committee member Karen Alzate (D) filed a bill (H. 7338) in January that would levy a 3 percent surcharge on taxable income over $1 million, on top of the state's highest personal income tax rate.
In Vermont, House Ways and Means Committee Chair Emilie Kornheiser (D) introduced a bill (H. 828) that would impose a 3 percent income tax surcharge on taxpayers with a federal adjusted gross income of $500,000 or more.
Other recent proposals would increase taxes on capital gains and intangible assets.
For example, Connecticut’s H.B. 5147 would make a slew of changes to the tax code to raise revenue for public education, including a 5 percent surtax on capital gains, dividends, and interest for taxpayers whose income is taxed at the highest marginal rates and increase rates for taxpayers with incomes over $1 million. The bill would also levy a 10 percent tax on companies with more than $10 billion in revenue from digital advertising services.
And Vermont's H. 827, also introduced by Kornheiser, would levy an annual tax on unrealized gains but allow taxpayers to open a state-run account to effectively defer payments on the assets until they are sold, with interest — a unique mark-to-market scheme that has no precedent on either the state or federal levels.
Lawmakers in Hawaii are also eyeing changes to capital gains — under H.B. 1660, which cleared the House March 5, capital gains would be treated like ordinary income and thus taxed at a higher rate rather than the current lower rate, which is capped at 7.25 percent.
As of press time, some measures have failed to gain traction. For example, a Washington bill (S.B. 5486) carried over from last session would have levied a 1 percent tax on the fair market value of all a taxpayer’s intangible assets, but the 2024 session ended without action on that bill.
And a proposed 1.5 percent tax on net wealth of the rich in California (A.B. 259) also failed again after a hasty hearing early in the session. Gov. Gavin Newsom (D) had openly expressed his opposition to wealth taxes the month prior, all but solidifying the measure’s death.
But the bill approved by New Mexico Gov. Michelle Lujan Grisham (D) in March restricts the state’s capital gains deduction from 40 percent of all net gains to 40 percent of up to just $1 million of net gains exclusively from the sale of a New Mexico business, a reform curbing a key tax break for higher earners. The bill also reduced tax rates for lower earners.
“States like New Mexico show that there is a different way, and that states can implement fair, equitable tax policy that also raises the revenue that they need for crucial programs," Wallin said.
Another victory for progressive tax advocates came in 2021 when Washington Gov. Jay Inslee (D) signed into law a tax on long-term capital gains. While critics have assailed the tax as an unconstitutional income tax in a state without one, the tax has thus far survived the legal challenges brought against it. However, a measure seeking to repeal the tax is headed to the November ballot.
Net wealth taxes, like that proposed in California's A.B. 259, represent a particularly ambitious and controversial policy for taxing the richest residents of a state, and have drawn intense debate. Brian Galle, a professor of law at Georgetown University, noted that such a measure “is going to impose a tax on everyone’s net wealth repeatedly every year,” in the same way homeowners are subjected to annual local property taxes.
Despite the failure of some proposals, there is a strong desire by many for new revenue, according to Norma Martinez-HoSang of the Connecticut For All campaign, which is backing H.B. 5147 in that state.
The coalition, composed of 68 community, faith, and labor organizations, was launched three years ago "with a mission to address systemic inequality by advocating for progressive revenue," according to Martinez-HoSang.
“We’re hearing over and over again that there isn’t enough money,” she said, referring to member groups’ priorities like immigrant healthcare and education. “All of our organizations have come together to say ‘yes, there is money, and we have a solution: the way to do it is changing the tax code.’”
Flight of the Rich
Despite the enthusiasm of progressive reformers, opponents of taxes targeting the wealthy regularly warn that many such levies could backfire and harm states’ economies and revenue bases.
For example, detractors have argued wealthy individuals will leave high-tax states. In July 2023, NBA player Grant Williams, who was then on the Boston Celtics, mentioned the Massachusetts millionaire's tax as one of the factors in his decision to sign a $54 million deal to be traded to the Dallas Mavericks.
“In Boston, it’s really like $48 million with the millionaire’s tax,” Williams said in an interview with The Athletic. He has since been traded to the Charlotte Hornets.
Another high-profile relocation is that of Amazon founder Jeff Bezos, who moved from Washington state to Florida at the end of last year. During a revenue forecast meeting of Washington's economic and revenue forecast council in February, lawmakers discussed how Bezos's recent move could dramatically reduce revenue generated by the state's controversial capital gains tax, which applies to annual long-term capital gains that exceed $250,000.
“We would have received $600 million in capital gains if he sold the same amount of stock he sold every other year,” Sen. Lynda Wilson (R) said, arguing that the tax motivated the billionaire to leave. But Rep. April Berg (D) pushed back, pointing out that Bezos has family and businesses in Florida, arguing that the blame can’t be placed squarely on the tax.
Critics have also said the capital gains tax is an unreliable source of revenue — Jason Mercier, vice president and director of research at the Mountain States Policy Center, called it “the most volatile tax outside of the severance tax.”
“I’ve personally heard of several businesses that are either selling or moving” because of the tax, Mercier said.
Fears of pushing the wealthy to leave aren’t limited to conservative critics. During discussion of A.B. 259 earlier this year, California Assembly Revenue and Taxation Committee Chair Jacqui Irwin (D) suggested that a wealth tax could drive out some wealthy residents who already represent the source of a significant share of the state’s revenue from its existing income tax structure, which includes a millionaire’s tax and taxation of capital gains as regular income.
The idea that higher taxes drive the wealthy to migrate is often cited by critics of higher taxes, but evidence is mixed. Several studies have attempted to examine behavioral responses to tax policy, and while their conclusions tend to vary, many find that taxes do play a role in migration. To what extent, however, seems harder to pin down.
A study by the National Bureau of Economic Research on a tax increase enacted on high earners in California in 2012 found that residents had strong behavioral responses to the change, ultimately eroding 45.2 percent of the possible windfall revenue the state could have seen. However, only 9.5 percent of that figure was attributed to migration — the rest was due to a decrease in reported taxable income.
Another study by Tufts University on the Massachusetts millionaire's tax concluded that “while some high earners are indeed likely to move, the number is relatively small,” citing both research on a wealth tax in Spain that found migration had minimal impacts on revenue gains from the tax and the aforementioned California study.
“Occasionally some people do move, no one denies that,” Galle said. “The point is that critics seem to think that if you have a wealth tax, the mobility response is going to be so big that it’s going to defeat the point of the wealth tax — it’s nowhere close to doing that.”
And critics should be careful to react to anecdotal examples, according to Sam Waxman, deputy director of state policy research at CBPP. “There’s always one anecdote — one wealthy person is moving,” she said. “Overblown concerns about migration really shouldn’t be a reason why states don’t pursue wealth taxes.”
When the wealthy do migrate, they seem to choose low-tax states. Using 2020 and 2021 data from the IRS, the Tax Foundation estimated that Florida and Texas — states without an income tax — saw the largest net gain in filers out of 26 states, with many of them being taxpayers with federal adjusted gross income of $200,000 or more.
But the answer isn't as clear-cut as either side would make it out to be, as reasons for moving are often tied to job changes or family obligations rather than taxes, Billy Hamilton said in a January 1 report in Tax Notes.
‘Capital Gains Problem on Steroids’
Beyond concerns about outward migration, some taxes on the wealthy are frequently criticized for their valuation schemes, impact on revenue stability, and in some cases the administrative challenges they pose.
Washington state’s capital gains tax has no shortage of critics. The recently enacted measure is going to be evaluated by voters in November after a ballot measure proposing its repeal received enough signatures. That tax is controversial because, due to Washington’s prohibition on nonuniform income taxation, it’s framed as an excise tax on the sale of assets, even though it’s measured by gains. Critics warn that could create conflicts when taxpayers try to claim credits against other states’ income taxes on gains.
“It’s clearly an income tax,” Mercier said, adding that the tax has also added a dose of uncertainty to the state’s revenue outlook. “Now you’re seeing the reaction since this is the lay of the land.”
The net wealth tax bill that was reintroduced by some progressive lawmakers in Washington’s now-ended 2024 session would be “the capital gains problem on steroids,” according to Mercier, who cited constitutional concerns as well as an increase in volatility.
“When you’re taxing paper versus realized income, I don’t think anyone is fully appreciative of the economic distortions that would come from that taxing scheme,” Mercier said.
Many of the concerns levied against Washington’s wealth tax proposal have also been brought against the California wealth tax proposal most recently contained in A.B. 259. David Kline of the California Taxpayers Association, which opposed that bill, said such a tax would be “completely impossible to administer."
“It's just not a fair way to tax people,” Kline said. “We think just the idea of taxing an unrealized gain doesn’t make sense. Until something is sold, the value is not known," he added.
Kline pointed to the individual who purchased what was then thought to be Tom Brady’s last football for over $1 million. “The next season Brady was back. If [the purchaser] had to pay taxes on that, what would he have paid?” Kline said. The football’s value dropped, but the taxes on its previously estimated values would already have been paid.
Vermont Looks to Change Things Up
But proponents of taxes on the super wealthy counter that there are ways to address such issues. Galle, who helped lawmakers draft H. 827, the Vermont bill that would tax unrealized capital gains, says the measure takes a unique approach that would address common valuation concerns.
Under the bill, taxpayers with net assets worth $10 million or more would be subject to personal income taxes on 50 percent of their unrealized gains on a mark-to-market basis, but they’d have the option of tying the assets to an account that defers the tax until they’re sold, with the addition of an interest charge.
“If you’re just looking at the outside of the car, it’s basically saying: ‘OK, you have something that’s hard to value. Don’t pay now, we’ll figure out how much tax you owe when you finally sell this asset, but because you got to keep it and earn profits on it without paying any tax for a long period of time, you have to pay some interest when you sell it,'” Galle explained.
“In the Vermont system it’s possible that many people will never pay tax until they sell the asset,” he continued. “It’s a realization-based system, even though it’s called a mark-to-market tax.”
Galle, along with David Gamage and Darien Shanske — professors of law at the University of Missouri School of Law and the University of California, Davis, School of Law (King Hall), respectively — authored a study that dubbed the accounts the “ULTRA (unliquidated tax reserve accounts)” method of taxing wealth.
The method was also floated on the federal level under a bill proposed last year by U.S. Rep. Steve Cohen, D-Tenn., dubbed the Billionaire Minimum Income Tax Act. Gamage, Shanske, and Galle worked with lawmakers on the act, as well as others at the state and federal level.
H. 827, like most bills of its kind, is still in committee. But it might stand a greater chance than most at advancing, given Vermont’s ultra-progressive General Assembly.
On the other hand, Vermont House bills to increase the top personal income tax rate on high earners and the top corporate tax rate appear to have more traction than Kornheiser’s unrealized gains proposal for now. Two of those measures, proposed by lawmakers on the hunt for a revenue source to fund healthcare access and housing expansions, have been sent to the Senate.
And the unrealized gains proposal is also not lacking for critics. In a recent blog post, Bhatt with the Tax Foundation argued that a provision in H. 827 that would require some nonresidents who spend a substantial amount of time in the state to remit taxes on a portion of their unrealized gains acts like a kind of exit tax.
“That is unique and raises some policy and legal questions,” Bhatt told Tax Notes. “Is that going to attract people to the state?”
Bhatt also said that although the surtax proposal in H. 828 would only affect 1 percent of filers in the state, that 1 percent accounts for 30 percent of all individual income taxes paid in the state.
“If you disincentivize even a small portion of that group, it could have a large effect on state coffers,” he said.
But even if Vermont’s bills meet the same fate as California’s proposal, advocates remain optimistic that they won’t be the last of their kind.
“I think big ideas and big progress often don’t happen overnight,” Wallin said. “Big corporations and wealthy individuals have so long held outsized power in state legislatures, and it takes time for a movement to build where community members and organizations are really driving policy.”
“I think it’s exciting to see big, bold proposals be part of the discussion,” Davis said of the Vermont unrealized gains bill. “We’re so accustomed to the big wild tax cut proposals.”
Martinez-HoSang added that increased participation in progressive tax coalitions is helping communities add their voice to the issue.
Whether wealth taxes might gain popularity as a necessary answer to revenue needs remains to be seen.
“State revenues are starting to slow and American Rescue Plan money is largely not available anymore,” Waxman said. “That’s creating a funding cliff in child care and education and states are going to be struggling to try and replace those dollars.”
Wallin echoed that sentiment.
“Even as we’re going into election seasons in so many different states, there’s a new and really pressing need for state legislators that are facing that decline in COVID funding to ensure that they’re keeping up revenues,” she said.
According to Davis, states that have made sweeping tax cuts might eventually look to increase consumption taxes and fees, unless some progressive revenue-raising proposals take off.
“The thing to remember is that tax cuts come with trade-offs," Davis said. "We know that what often happens in the face of revenue shortfalls is that lawmakers will cut services or raise revenue — usually a combination."
Proposals to raise taxes on high-income earners still face immense challenges, but advocates are far from throwing in the towel. And it’s possible that in addition to revenue needs, the growth of a larger narrative — that high taxes on the rich are a matter of fairness and a way to combat wealth inequality — could benefit the movement as well.
Mercier, although opposed to that idea, said it has nonetheless been growing among progressive reformers.
“I think it’s been kind of a change in the fundamental understanding of the tax system,” Mercier said. “I think it’s a philosophical difference in opinion in what the purpose of the tax code is — the purpose of the tax code is to have predictable, stable taxes to fund the core functions of government.”
Correction, April 4, 2024: An earlier version of this article said that Darien Shanske is a professor of law at the University of Southern California. Shanske is a professor of law at the University of California, Davis, School of Law (King Hall).