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Tax-the-Rich Blue States Want to Leave Wealthy ‘Nowhere to Hide’ (1)

Jan. 19, 2023, 6:23 PMUpdated: Jan. 19, 2023, 10:08 PM

Progressive lawmakers in a handful of blue states joined forces Thursday in a campaign to fire up energy for tax-the-rich policies in state capitols.

The effort is a way for Democratic lawmakers to counter arguments that wealthy residents will move away, and to broadly promote progressive tax policies, especially with Republicans controlling the US House of Representatives.

“Let’s make sure if they move, they have nowhere else to go because we’re all taxing them together,” Washington state Sen. Noel Frame (D) said.

The ideas have been floated before, and their prospects for passage are unclear. Lawmakers from four states—California, Illinois, New York, and Washington—are proposing taxes on wealth that would be the first of their kind if enacted, difficult to administer, and vulnerable to legal challenges. Two more measures in New York and proposals in four other states—Hawaii, Maryland, Connecticut, and Minnesota—take more conventional approaches to raising taxes on realized income.

The organization behind the effort is Fund our Future, backed by the State Innovation Exchange and State Revenue Alliance, which help state lawmakers advance progressive policies, including higher taxes on corporations and the wealthy. It’s an offshoot of a campaign with the same name launched in 2019 by the American Federation of Teachers focusing on education funding in the states, but the teachers group isn’t funding the wealth tax effort.

Unique, But Together

Proposals in the coordinated effort vary so they can navigate different constitutional constraints in each state, Jared Walzcak vice president of state projects at the conservative-leaning Tax Foundation, said in a blog post.

“The constant across all seven states, or wherever such taxes are proposed: wealth taxes are economically destructive, their base is almost impossible to measure accurately, and they create perverse incentives and promote costly avoidance strategies,” Walczak said.

The bills in New York and Illinois would impose tax on net assets above $1 billion, similar to approaches lead by Massachusetts Sen. Elizabeth Warren (D) and Washington Rep. Pramila Jayapal (D).

Massachusetts voters recently adopted a new tax on millionaires to fund education and infrastructure projects.

Jayapal participated in the joint state announcement, saying the state-level effort is a contrast to Republicans calling for tax breaks for the wealthy.

Illinois state Rep. Will Guzzardi (D) said his bill would require taxpayers to annually recognize gains in the value of their assets as income, which could be taxed at Illinois’ flat rate of 4.95%. The proposal would raise an estimated $510 million in its first year. Funds would be channeled into a new Working Families Fund used to support childcare, public education, and services for the homeless.

The legislation carries risks for Illinois, which is still smarting from the departure of hedge fund billionaire Ken Griffin, a frequent critic of the state tax code and the owner of Citadel LLC. After operating from Chicago for more than three decades, Griffin announced last June he was moving his family and his business to Miami. Florida doesn’t have a personal income tax. Griffin recently ranked No. 41 on the Bloomberg Billionaires Index, with a net worth of $29.3 billion.

To combat a potential pattern of billionaire outmigration, Guzzardi said, the states have to collaborate.

“That’s part of why we are working as a multistate coalition,” he said. “We want to send a message that there is nowhere to hide.”

In California, Assemblyman Alex Lee (D) has two bills. One would extend the state’s taxing authority under its constitution to “all forms of personal property or wealth, whether tangible or intangible.” It also would reduce the vote threshold from two-thirds to a majority for the Legislature to classify forms of personal property or wealth for differential taxation, and would repeal a 1970s limit on per capita state spending.

The other would impose tax on net worth over $50 million. Lee found little support for similar bills he introduced in 2021 and 2022.

Frame, who spearheaded an unsuccessful Washington wealth tax bill in 2022, is trying again with a measure to impose a 1% property tax on financial tangible assets above $250 million held in stocks, bonds, publicly traded options, and futures contracts.

If the wealth taxes are enacted they would generate $40 billion in the first year from 300 billionaires in California, Illinois, New York, and Washington, said Emmanuel Saez, who helped craft them and is a University of California Berkeley economics professor and director of the Center for Equitable Growth.

New York state Sen. Gustavo Rivera (D) also is introducing a bill to close the gap between the tax rate on capital gains and the tax rate on regular income. At the federal level, the highest earners pay a 20% tax on capital gains—earnings from selling stock, real estate, or other assets—and a 37% tax on earned income. Rivera’s bill would impose an additional 7.5% tax on capital gains for New York married couples with income above $550,000, and 15% for couple with incomes above $1.1 million.

Other bills include one in Maryland to add 1% on top of the highest income tax rate for some capital gains. In Connecticut, a proposal would impose a 5% surtax on capital gains for individuals with more than $500,000 in income and 20% for those with $100 million or more. The bill also would increase the corporate income tax rate to 11.5% from 7.5% and create a digital advertising tax.

In Hawaii, new bills would impose the state’s ordinary income tax rates on capital gains and impose the state’s estate tax on transfers of property owned by nonresidents. A Minnesota bill would lower the exemption cutoff for the estate tax.

Wealth-tax bills are being introduced elsewhere, although they weren’t part of Thursday’s joint effort. In Oregon a bill (H.B. 2673) would add a 13% tax bracket for incomes over $500,000.

To contact the reporters on this story: Laura Mahoney in Sacramento, Calif. at lmahoney@bloomberglaw.com; Donna Borak in New York at dborak@bloombergindustry.com; Michael J. Bologna in Chicago at mbologna@bloomberglaw.com

To contact the editors responsible for this story: Kimberly Wayne at kwayne@bgov.com; Kathy Larsen at klarsen@bloombergtax.com