The States Come Marching In: Investors Ignore State Wealth Taxes At Their Peril

• Jurisdiction: United States,Federal
• Law Firm: Cadwalader, Wickersham & Taft LLP
• Subject Matter: Tax, Income Tax, Capital Gains Tax
• Author: Mr Adam Blakemore, Andrew Carlon, Catherine Richardson, Linda Swartz, Jon P. Brose, Mark Howe and Gary Silverstein
• Published date: 27 February 2023

As President Biden reminded taxpayers in his recent State of the Union address, the federal government continues to pursue new taxes on high-net-worth individuals. While such efforts have foundered in Congress, causing many to discount these federal proposals as political messaging with little substantive risk, a greater risk of similar initiatives becoming law on the state level may be lurking. In particular, the constitutional and political impediments to federal wealth tax proposals may not be as acute at the state level.

The Federal Landscape

During his February 7, 2023 State of the Union address, President Biden called on Congress to pass a minimum tax on "billionaires." Presumably, more details will become available in the coming weeks when the President releases his 2024 budget framework, but the minimum tax may follow the Billionaire Minimum Income Tax Act, here, that was introduced in the House in July of 2022. That proposal imposes a 20% minimum tax on households with more than $100 million in income or more than $1 billion in "net unrealized gain" (i.e., gains from a hypothetical sale of a taxpayer's assets for any calendar year). Other recent federal attempts to tax high-net-worth individuals include bills introduced in 2021 by Senators Ron Wyden (D-OR) and Elizabeth Warren (D-MA), respectively (here and here). As discussed here, Senator Wyden's bill effectively requires individual taxpayers with greater than $100 million in income or $1 billion in assets to annually mark to market certain assets and recognize capital gains thereon, whereas Senator Warren's bill imposes a 2% annual tax on the net value of all assets above $50 million and a 3% annual tax on the net value of all assets above $1 billion. To date, none of these bills has progressed beyond committee.

Much of the impetus for these wealth tax proposals stems from the ability of high-net-worth individuals to monetize the appreciation in their assets (e.g., by borrowing at low rates against an appreciated asset) without triggering a "realization" event that would crystalize their appreciation as currently taxable income. As such, the proposals often involve some form of mark-to-market valuation to justify imposing a current tax on the unrealized "income" inherent in the appreciated assets. However, in its most naked form, a potential wealth tax may simply impose an annual tax on wealth itself, irrespective of the existence of untaxed appreciation in the assets.

Beyond the political...