Revival of the Wealth Tax May Prompt Constitutional Challenges

This coming year will reveal whether the revival of the wealth tax remains symbolic or becomes structural. Expect congressional hearings on mark-to-market taxation, renewed state-level proposals, and inevitable constitutional challenges—possibly fast-tracked to the Supreme Court.

The movement may already have begun on Jan. 1, when Zohran Mamdani became New York City’s mayor. Mamdani campaigned on a 2% income tax increase on city residents with an annual income of $1 million or more and advocated for raising the state’s top corporate tax rate from 7.25% to 11.5%, all to help pay for improved city services.

While the wealth tax movement may start in New York City, it won’t end there. Whether enacted or merely debated, 2026 will force deeper reckoning over what the American dream now owes to the state that underwrites it.

More Than Moore

The US Supreme Court in 2024 upheld a one-time tax on foreign corporate earnings in Moore v. United States but sidestepped whether Congress can tax unrealized gains as “income.” The 7–2 majority sustained the law without defining its constitutional limits.

That silence became political oxygen. Sen. Ron Wyden (D-Ore.) in September reintroduced his Billionaires Income Tax Act, and for the first time, companion legislation appeared in the House. With 21 Senate and 27 House co-sponsors, the proposal marked the first bicameral attempt to tax wealth through mark-to-market accounting.

Wyden’s bill would tax annual unrealized gains for individuals with over $1 billion in assets or $100 million in income for three straight years—treating appreciation itself as taxable income. In 2021 and 2023, such proposals were largely symbolic.

But 2025 was different not just because of legal ambiguity—there also was fiscal urgency. The Congressional Budget Office projected a $2 trillion deficit in fiscal year 2025, the highest since the pandemic. Wealth concentration also hit a postwar high, with the top 0.1% holding 20% of US assets.

Still, constitutional landmines remain. A wealth tax likely would qualify as a “direct tax,” which under Article I of the Constitution must be apportioned among the states by population and mathematically impossible given the distribution of wealth.

Some critics argue that taxing unrealized gains exceeds the 16th Amendment’s scope. Others warn of a timing problem rather than a rate problem. Many entrepreneurs fail, but a few succeed spectacularly. A tax on unrealized gains targets the winners before the game is over, when their equity is illiquid and outcomes uncertain.

Founders then face three bad options: Sell shares and dilute control, borrow against volatile stock, or force a premature exit. Each choice lowers the expected value of taking risks in the first place. The result isn’t just less capital; it’s less courage.

Even if legally sound, wealth taxes stumble on administration. Europe learned this the hard way. The Organization for Economic Cooperation and Development found many countries repealed their wealth taxes because the cost of valuation and litigation exceeded the revenue they collected.

Innovation Crossfire

Supporters frame wealth taxes as a fairness issue; critics see a drag on innovation. Both may be right, but the mechanism matters. In a system that depends on risk-weighted payoff asymmetries—the few big wins funding the many losses—taxing potential rather than realized success converts the venture economy from a lottery into a salary.

At the very moment the US is competing with China on semiconductors, with Europe on green technology, and with everyone on AI, policymakers must decide whether to tax potential energy or kinetic achievement.

A recurring wealth tax—or any broad tax on unrealized gains—does the former: It charges people on the value of risky projects before they’ve turned into actual income, effectively taxing the expected payoff of innovation. By contrast, traditional income and capital-gains taxes wait for those bets to pay off and then take a slice of realized success.

Traditional tax policy targets flows, or the movement of money—wages, dividends, realized gains. A wealth tax targets a single moment in time, the stillness of possession.

That distinction goes to the heart of the US social contract. The 16th Amendment authorized taxes on income, reflecting a belief that taxation follows production. A wealth tax suggests something more radical: that the ownership of property, by its existence, carries an ongoing public claim.

Whether that principle takes hold will define the political identity of the next decade, not just the 2026 tax landscape. If voters accept that large fortunes carry an ongoing public claim, it doesn’t just justify one more levy on the rich; it rewrites who is expected to fund everything.

On climate, it would frame multitrillion-dollar transitions as a call on balance sheets built in a fossil-fuel order. On industrial policy, it would normalize the state recycling those levies into semiconductors and artificial intelligence as a type of co-investor rather than an occasional grant-maker.

On the Horizon

While Washington, DC, debates, the states are gaming their own equilibrium. Washington’s proposal would levy a 1% tax on global wealth above $100 million starting in 2026. California proposed something more radical—a “trailing nexus” rule that taxes former residents for up to 10 years after they leave the state. It’s less policy than a way to make exit so costly that staying becomes the rational choice.

But this sets up a coordination problem. If only one state defects (taxes aggressively), capital flees. If all defect together, each adding exit penalties, the collective move pushes high-net-worth individuals to consider the ultimate exit: leaving the country. The same logic that once doomed European wealth taxes could resurface in interstate form.

For now, some politicians seem content to use the threat itself as leverage. The credible possibility of a wealth tax can extract concessions on income-tax rates or philanthropy without ever being enacted—a signaling game where the threat is the point.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Robert F. Mancuso is a former SEC attorney and CEO of Capri Capital Partners.

Paul Mancuso contributed to this article.

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