Democrats’ Wealth Tax Dreams Look Dim After Supreme Court Ruling

Democrats’ tax-the-rich agenda, the cornerstone for their 2025 tax cliff plans, faces greater hurdles after last week’s Supreme Court ruling.

The high court ruled in Moore v. United States that the levy on foreign earnings, implemented in the 2017 tax law, is constitutional. Some conservatives had hoped the justices would strike down other hypothetical taxes on unrealized income. Such a broad ruling would have upended much of the tax code, as some like former House Speaker Paul Ryan (R-Wis.) had warned.

That didn’t happen, but proposals like Senate Finance Chair Ron Wyden’s (D-Ore.) billionaire tax and Sen. Elizabeth Warren’s (D-Mass.) wealth tax idea may not be out of the woods yet.

While the majority’s decision didn’t directly address the issue of whether taxing unrealized gains, such as a wealth tax, would be unconstitutional, some justices indicated they wouldn’t be inclined to uphold those types of taxes if the question came before the court. That might spell trouble for Democrats, who are pushing those kinds of proposals to pay for other tax breaks.

Four justices explicitly wrote they believe there is a realization requirement, and one, Justice Ketanji Brown Jackson wrote in nonbinding language that there is no requirement. The other four didn’t address the issue.

“I think you would come away more skeptical that a wealth tax or a tax on deemed income would likely pass constitutional muster from this court,” said Pat Brown, partner and co-leader of Pricewaterhouse Cooper’s Washington National Tax Services practice. “That math makes it a tougher hill to climb for people who want the wealth tax or a broad mark-to-market tax to be considered constitutional.”

Brown said lawmakers drafting wealth tax proposals now have cause to have some additional concern on whether the high court would rule in their favor.

Best to Hope for?

The Supreme Court largely avoiding the realization question was the best case scenario for Warren, said Beverly Moran, a tax professor at Vanderbilt Law School. Moran has written that Warren’s wealth tax proposal—a 2% annual tax on the net worth of households and trusts between $50 million and $1 billion—may be unconstitutional.

“The best she could have hoped for is that somehow the Supreme Court made a sweeping decision that realization is not a requirement in the Internal Revenue Code, but nobody expected them to do that,” Moran said. “Realistically this is the best she could have possibly hoped for.”

For Warren and allies, at least, the ruling was a win.

“The fight goes on to tax the rich, pass a wealth tax on ultra-millionaires and billionaires, and make the system more fair,” Warren said in a post on “X,” formerly known as Twitter.

“When a Right Wing Supreme Court upholds the breadth of the federal taxing power, that’s good news for everyone who supports taxing billionaires and multinational corporations,” Jeremy Bearer-Friend, a law professor at George Washington University Law School and a former tax counsel to Warren, said in an email.

The Massachusetts Democrat’s plan has been estimated to raise at least $3 trillion in revenue over 10 years—which would be a useful pay-for as lawmakers next year face the expiration of nearly $4 trillion of tax cuts from the 2017 tax law. Democrats have said they only want to extend the tax cuts for those making under $400,000, though that’s still costly.

Other Democrats’ legislation may fare better if there were to be a legal challenge.

Wyden has argued that if his bill taxing unrealized capital gains is unconstitutional, then large swaths of the tax code are as well. That’s similar to the argument that lawmakers, former staffers, the Joint Committee on Taxation, and tax professionals made ahead of the Moore decision, as they said striking down the transition tax would have upended much of the tax code.

“There is no question about the constitutionality of proposals like my Billionaires Income Tax that draw on existing law,” Wyden said in a Friday statement. “The only question is whether the ultra-wealthy, right-wing donors who’ve lavished gifts on Republican justices will get their money’s worth in some future case because a different majority decides to trash another long-standing legal precedent.”

Moran noted, too, that the ruling could boost Democrats this election cycle, if they push the narrative that more justices appointed by former President Donald Trump would be against the wealth tax.

Ultimately, the high court didn’t rule on the issue of the broader realization requirement, leaving that showdown for another day, Tony Nitti, a principal at Ernst Young’s National Tax Department, said. Justices didn’t necessarily leave the door open for a wealth tax, and they didn’t shut it either, he said.

“To some degree, battle lines have been drawn here with the opinion,” Nitti said. “We’ve got at least four justices saying we believe there’s clearly a realization requirement and trying to tax unrealized appreciation is beyond the reach of Congress. Now we just have to look for some future challenge that will eventually force the Supreme Court’s hand.”