california tax-law new-york-state legislature
Could U.S. states test a wealth tax?
<p>There has been some debate in the Democratic Party on the subject of a federal wealth tax.  I know that there is some debate about the constitutionality of a wealth tax, but for the purpose of this question, I would either assume that the wealth tax is constitutional or that the states were enacting this law to test its constitutionality.</p>

<p><a href="https://www.usnews.com/news/best-states/slideshows/states-with-the-most-billionaires" rel="nofollow noreferrer"><em>U.S. News &amp; World Report</em> states</a> that 40% of billionaires in the United States live in either New York or California, where Silicon Valley and Wall Street bind many of the extremely rich to the businesses that made them so wealthy.</p>

<p>Obviously, the biggest problem for a state like California trying to extract revenue from its uber-wealthy populace would be that they would simply move their residence and use any other possible legal loophole to avoid having to pay.</p>

<p>At the same time, many of these billionaires built their wealth out of business empires that are firmly established in those states, like Mark Zuckerberg's Facebook. The process of moving a business of that size and cultural significance would be immeasurably expensive because those firms rely on an elite talent pool that is very locale-centric for their recruiting, and they have employees that could choose to leave the company rather than relocate.</p>

<h1>The Validity of State Wealth Taxes</h1>
<p>Yes. States can impose wealth taxes, although this doesn't clarify the validity of a federal wealth tax. States have broader taxing power than the federal government in terms of kinds of taxes that they may constitutionally impose.</p>
<p>A state may impose any tax (1) that does not unduly discriminate against a federally protected constitutional civil liberty (like freedom of the press), (2) that does not purport to tax the federal government (arguably any other sovereign) without its consent, (3) that does not unduly discriminate against interstate commerce, and (4) that has some rational basis.</p>
<p>Apart from these specific limitations and (5) any found in state law or the state's constitution, (6) a state's taxing power is plenary as to conduct or activity or property that has a sufficient connection to the state to provide it with jurisdiction. A recent U.S. Supreme Court case repealed some clear rules of the road regarding what states do not have the jurisdiction to tax, effectively increasing state tax jurisdiction considerably, for example, to impose sales taxes on Internet retailers.</p>
<blockquote>
<p>the biggest problem for a state like California trying to extract
revenue from its uber-wealthy populace would be that they would simply
move their residence and use any other possible legal loophole to
avoid having to pay.</p>
</blockquote>
<p>This is true. The primary question regarding the validity of a state wealth tax would not be whether a state could impose a wealth tax, but what assets could a state make subject to its state wealth tax. This might be easy to answer in the case of real property, but hard in the case of intangible property or property held via entities. Federal statutes may, however, establish which states have jurisdiction to tax which assets with a state wealth tax as part of the power to regulate interstate commerce, or by ratifying a compact reached between multiple states which have state wealth taxes.</p>
<p>Still the facts that many countries in the European Union impose or have historically imposed wealth taxes that generate significant tax revenue, despite the easy ability to the affluent to relocated to other countries in the E.U. that is closely analogous to that of U.S. states seeking to do the same thing, suggest that this is not an insurmountable task, even if there might be some leakage of untaxed wealth at the margins.</p>
<h1>The Validity of Federal Wealth Taxes</h1>
<p>In contrast, Congress may only impose taxes expressly authorized by some provision of the U.S. Constitution as amended. The applicable case law on the issue of the constitutionality of a federal wealth tax is not entirely settled.</p>
<p>The gift, estate and generation skipping transfer tax system has been held to be constitutional, but since this is a tax imposed on transfers of wealth, it is arguably a tax in lieu of an income tax treated separately for ease of administration (since gifts and inheritances are within the core definition of income in the Internal Revenue Code at Section 63, but then specifically exempted from income taxation in lieu of donative transfer taxes like the gift and estate tax, in a separate statutory Section 102 of the Internal Revenue Code.).</p>
<p>Federal property taxes in areas not in exclusively federal jurisdiction (e.g. Virginia rather than the U.S. Virgin Islands) were briefly in force in the 1700s, but were repealed before they could be subject to a constitutional challenge.</p>
<p>Income taxes, even at 90% marginal tax rates, have been upheld as valid.</p>
<p>The analysis and doctrines involved are rather involved for a short answer in this forum, and I am fairly certain that there is published legal scholarship arguing both sides of this question of first impression.</p>
<p>In a nutshell, a federal tax must either be an income tax; tax imposed on states rather than individuals on a per capita basis; or an excise tax or duty or tariff. The first two types of taxes are comparatively well defined. The third is the subject of thin, mushy and somewhat inconsistent or indeterminate case law.</p>
<p>One could argue, for example, that a wealth tax is really a form of income tax on imputed income from assets that could generate additional value to the owner even if the value that arises from this ownership is not monetized or realized. This argument would be particularly strong if wealth taxes paid with respect to an asset were allowed as a tax credit against taxes imposed on income generated by that same asset, in a manner similar to the foreign tax credit today.</p>
<p>A wealth tax clearly isn't a per capita tax on a state government. No such tax has ever been imposed for any meaningful amount of time and has never been a more than nominal source of federal revenues if it has ever generated any federal revenues.</p>
<p>There is also a credible argument that a wealth tax is a constitutionally valid excise tax or duty or tariff, focusing on the excise tax component, which is quite ill defined, because the courts have tended to side with the government on issues of the scope of the federal power to tax except in the clearest and most blatant cases of violations of the federal power to tax.</p>
