Wealth tax bills find resistance in blue states

Two months after progressive lawmakers in eight states simultaneously proposed raising taxes on the ultra-rich, only a quarter of their bills have had a hearing and none have been voted out of their first committee.

The bills are opposed by Republican lawmakers and some Democrats, who say higher taxes will drive away extremely wealthy residents. Innovative proposals that would tax net worth, rather than income, also raise legal questions and could be tough to implement, tax policy experts say.

But the bill sponsors, who intend to keep pushing, say higher taxes on millionaires and billionaires would narrow the gap between rich and poor and raise revenue for health care, schools and other programs that help people.

Washington State Sen. Noel Frame (D) says taxing wealth is the best way to combat staggering inequality. She proposed a 1% tax on state residents’ stocks, bonds and other financial assets worth over $250 million.

“After a lot of thought, and really thinking about the modern economy, I landed on this proposal,” Frame said. “Because wealth is so concentrated at the top, and the wealth is held in financial assets.”

Ultra-wealthy people can easily avoid paying income taxes if they own large businesses and don’t pay dividends or sell their stock, said Emmanuel Saez, a professor of economics at the University of California, Berkeley who studies inequality.

Frame’s bill is one of 12 announced in January in partnership with the State Innovation Exchange, a progressive strategy group, and State Revenue Alliance, a nonprofit that helps groups lobby for more equitable tax policy. Bills were introduced in California, Connecticut, Hawaii, Illinois, Maryland, Minnesota, New York and Washington.

Four of the bills would raise taxes on inheritances, four would raise taxes on investment income, and four — including Frame’s — would tax assets held by the ultra-rich. Saez helped write some of the proposals; he previously helped design U.S. Sen. Elizabeth Warren’s (D) wealth tax plan.

Frame proposed her first wealth tax bill in 2021 and helped kickstart this year’s multistate effort by reaching out to other lawmakers with similar proposals. “The organizer in me just started calling people that had already introduced bills,” she said.

State Innovation Exchange last summer convened about 70 lawmakers and advocates, such as people who work for labor groups and policy think-tanks, to discuss raising taxes on the ultra-rich, said Kyle Huelsman, senior director of legislative affairs for State Innovation Exchange.

Huelsman’s group has also hosted monthly videoconferences for the group since August, he said.

He said the goal is to build a national movement in favor of wealth taxes rather than write a model bill. “There’s not a single answer, a single bill that can solve this problem,” he said.

Some of the bills announced in January would raise existing taxes. Others would tax wealth for the first time.

New York Sen. Gustavo Rivera (D) proposed adding a 7.5% tax on capital gains sold by people who earn over $500,000 a year and an additional 5% tax on capital gains sold by people who earn over $1 million a year.

His bill didn’t make it into the New York Senate’s budget resolution, but he said he is trying to get it included in the final budget or passed later this year. “We still have a few months left in the session that I will be banging away, along with many of my colleagues, on making some of these things a reality,” he said.

New York Gov. Kathy Hochul (D) has said she supports renewing a 2021 tax increase on wealthy New Yorkers but doesn’t want to go further.

“We have to make sure that we live within our means right now, and not do anything that has people contributing to the tax base not be here any longer,” Hochul said last week, according to State of Politics, a blog affiliated with Spectrum News.

Losing a billionaire can deal a major blow to states with progressive tax codes, such as California, New Jersey and New York. A hedge fund multi-billionaire’s 2015 move from New Jersey to Florida could have cost the Garden State hundreds of millions in tax payments, the New York Times reported at the time (he moved back in 2020).

Whether high taxes drive out the typical high-income resident is debatable, but extremely wealthy residents — who typically have multiple homes — may be a special case, said Richard Auxier, a senior policy associate in the Urban-Brookings Tax Policy Center, a joint venture between two Washington, D.C. think tanks.

“When we’re talking about the wealthiest of the wealthy, you have a group that will respond to this,” he said. “One, because they pay attention, and two, because they can.”

Frame’s proposal and others that would tax assets held by the ultra-rich would create a brand-new tax on a new tax base, Auxier said. The federal government does not tax wealth, so state revenue officials would have to figure out how to assess and collect such taxes.

California Assemblymember Alex Lee (D) has proposed levying a 2% tax on Californians’ net worth over a billion dollars by 2026 and a 1% tax on Californians’ net worth over $500 million. His bill would tax both financial assets such as stocks and bonds and tangible assets such as property and fine art.

As in New York, the proposal is not getting much love from the governor. California Gov. Gavin Newsom (D) “has consistently opposed a new wealth tax at the state level,” Newsom spokesperson Brandon Richards told Pluribus News in an email.

A 1% or 2% tax on wealth sounds small but would have an outsized impact on wealthy taxpayers, said Jared Walczak, vice president of state projects at the Tax Foundation, a conservative-leaning think tank based in Washington, D.C.

“It’s taxing the total principal, not just the gains on it, every single year,” Walczak said. “It’s a very significant tax. A 1% wealth tax is way more significant than any state’s existing income tax, even California’s 13.3% top-rate income tax.”

Frame’s bill has garnered more support than most of the 12 bills in the multi-state effort, but there is still no guarantee it will advance.

Her proposal would function like a property tax and raise revenue for education, housing, disability services and tax credits for low- and middle-income families. Her Senate bill has 18 cosponsors and its House companion has a primary sponsor and 42 cosponsors. Both the House and Senate versions have received a hearing.

Critics of Frame’s proposal, such as Walczak, say it is unconstitutional. Washington State’s constitution prohibits income taxes. The state Supreme Court is weighing whether a 2021 tax on capital gains can be implemented.

Frame said her bill is constitutional. “It was designed to be compliant,” she said.

Washington State’s reliance on taxing sales means low-income people pay a greater share of their earnings in state taxes than high-income people do. Democrats there have tried for years to make the tax code more progressive, groundwork that Frame says will help her bill.

“We do have momentum,” she said. “I mean, we spent the last 10 years working on the capital gains tax, and really having a conversation in Washington State about our upside down and regressive tax code.”