“The point here is to make sure we’re doing at the state level what isn’t being done at the federal level,” said Gustavo Rivera (D), a New York state senator who is part of the seven-state group.
Some state bills resemble the “wealth tax” that Senator Elizabeth Warren (D-Mass.) threw out during her 2020 presidential candidacy. It’s a form of taxation never before tried in the United States, where very wealthy people would pay taxes annually. have to pay on assets 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.
State lawmakers say they want to try out such ideas as a test case for future national policies while acting collectively to minimize the threat of people moving to a nearby state with lower taxes.
“States are the laboratories of innovation,” said Noel Frame (D), a Washington senator. “But taxes are different. That’s why we’re all here together.”
No longer will states “compete against each other,” she added.
Sponsors told The Washington Post they will file their bills 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, such as a Connecticut proposal to create new tax brackets for the wealthy, have a greater chance of succeeding 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 pass, while an increase in the state’s capital gains tax passed but met with a lawsuit . A California wealth tax similar to the one Alex Lee (D) plans to reintroduce this week was sponsored last year by just five of the state assembly’s 80 members.
Wealth tax skeptics, for their part, say the idea may be even worse at the state level than at the national level, since the wealthy can easily move to another state.
“Wealthy high net worth individuals are fairly mobile, and it’s much easier to move from state to state than it is to leave the country,” said Jared Walczak, who works on tax policy for the right-wing tax foundation.
Walczak points out that California’s wealth tax proposal — which would remain in effect for several years after a resident leaves the state — would almost certainly be challenged in court. And more broadly, any wealth tax that generates income from a small pool of the state’s wealthiest people can easily unravel if just one or a few very wealthy people decide to move, he argues.
In addition, he says, assessing the value of one’s wealth would be a challenge for state bureaucrats and sometimes lead to unfair results, as in the case of the founders of Silicon Valley, whose companies have huge paper valuations that are difficult to assess. or to be taxed. in a simple way.
“Just because a company can sell for hundreds of millions of dollars in the future doesn’t mean current owners have significant assets,” Walczak said. Billionaires’ net worth on paper fluctuates drastically as stock prices or valuations of companies rise and fall, making it difficult to figure out how much they would have to pay if taxed on that wealth, he added.
But Frame, the Washington legislator, argues that billionaires should still be taxed on such assets, even if they don’t actually have the money in their bank account. After all, property taxes go up when the homes are rated at a higher value, even if residents don’t actually see that money without selling the home, she notes.
Emmanuel Saez, a Berkeley economist who helped design Warren’s wealth tax proposal, said state lawmakers began contacting him asking how they could impose a similar tax in their states during the 2020 presidential campaign. He helped in drafting the variations on a wealth tax that will be proposed this week in California, New York and Washington.
He has no objection to a tax that could force wealthy people to sell stocks or other assets, he said. In the case of the California proposal, which would impose a 1.5 percent tax on more than $1 billion in assets, “you would sell 1.5 percent of your stock and pay the tax,” he said. “If it’s an annual wealth tax, it will cost a fraction of your wealth each year. Almost by definition, you have less wealth after you pay the tax.
A fresh look at capital gains
In four states — the three that drafted bills involving Saez’s involvement, along with Illinois — lawmakers say they will launch versions of a wealthy people’s property tax, or so-called “mark-to-market” taxes on their unrealized capital gains. But other states will file more conventional tax proposals.
For example, lawmakers in Connecticut will consider raising income taxes for high earners, as the District of Columbia and New York have done in recent years.
Lawmakers in Connecticut, Hawaii, Maryland and New York, meanwhile, are proposing an amendment based on some Democrats’ frustration with state tax policies. The federal government taxes capital gains — the income a person earns from the sale of stock or similar assets — at a different rate than other income. The highest earners pay a 20 percent tax on capital gains, while they pay a 37 percent tax on wages — an inequality 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 signed a bill that would introduce an additional 7.5 percent tax on capital gains for New York married couples with a income in excess of $550,000. and 15 percent for couples with incomes over $1.1 million.
In Maryland, Del. Julie Palakovich Carr (D-Montgomery) propose an additional 1 percent tax on top of the income tax rate on certain capital gains. “At an emotional level, people are realizing that working for money is not the same as getting passive income,” she said.
And in Hawaii, Maryland and New York, bills will propose a measure that will have a greater impact on the middle class of wealthy people, not just the ultra-rich: lowering the estate tax exemption limit. In the case of Maryland, families would owe taxes on inheritances in excess of $1 million instead of $5 million as it is today.
Del. Jheanelle K. Wilkins (D-Montgomery), who previously unsuccessfully introduced such a bill, said she hopes the idea will gain traction as the pandemic has exposed the inequality between rich and poor. “That’s quite a bit of money we’re leaving on the table,” she said.