Wealth taxes have been hotly debated and contested for years.
Many are focused on potential federal tax increases, but let’s not forget our beloved states and cities. With America’s states and cities facing massive revenue shortfalls and continued uncertainty due to COVID-19, some states are moving forward with proposals of tax increases for millionaires and billionaires. So far, four such states, a few already with high individual income tax rates, have been the most proactive. Below is a summary of the state proposals and changes.
In August 2020, a group of progressive state legislators proposed a 0.4 percent tax on net worth that exceeds $30 million for single and married filing joint taxpayers ($15 million per spouse for married taxpayers who file separately). Net worth would include assets and liabilities held globally and exclude real estate directly held by taxpayers.
The proposal is intended to raise $7.5 billion for the state’s general fund. If passed, the tax would apply each year to filers’ net worth as opposed to a tax on income or transfers (estates and gifts). Also, the wealth tax would apply to former residents for 10 years after a change in domicile.
In addition, California lawmakers have introduced a new assembly bill that would increase the top individual income tax rate to 16.8 percent, retroactive to the start of 2020.
On November 3, 2020, residents of Illinois will vote on whether state lawmakers can overturn the current flat tax rate to a progressive individual income tax. Among other proposals, under the Illinois Allow for Graduated Income Tax Amendment, Illinoisans would pay individual tax rates ranging from 4.75 percent to 7.99 percent, starting January 1, 2021.
Under the new proposal, single taxpayers earning more than $750,000 and married filing joint taxpayers earning more than $1 million would be taxed at the top rate of 7.99 percent. Also, at this bracket, the taxpayers’ net income would all be taxed at this top rate. Illinois' current individual income tax rate is a flat 4.95 percent for all taxpayers.
On September 17, 2020, New Jersey Governor Phil Murphy signed a revised 2021 budget that includes a millionaires tax. New Jersey lawmakers had attempted to pass a millionaires tax six other times since June 2020.
In 2019, the top marginal individual tax rate was raised to 10.75 percent for taxpayers with annual income over $5 million. The new budget lowers the threshold to taxpayers with annual income over $1 million.
In July 2020, a new campaign was established to tax billionaires who reside in the state of New York. A rehashing of past high-net-worth tax proposals, the additional monies from the tax would assist those hurt by the economic crisis resulting from COVID-19.
The tax, part of a new “Make Billionaires Pay” campaign by progressive lawmakers and activists, would impose a new form of mark-to-market tax on unrealized gains on New Yorkers with $1 billion or more in assets. Currently, taxpayers only pay capital gains tax when an asset is sold. The new proposal would tax, on an annual basis, any gain in the value of an asset, regardless if it was sold or not.
In addition to states discussed above, a few other states are considering raising income taxes on the wealthy and have proposed a variety of potential tax increases on high-net-worth individuals. High earners in Massachusetts, Maryland, Wisconsin, Hawaii, Oklahoma and Vermont, in addition to the four states discussed in this Alert, house more about half of the country’s millionaires, and high-net-worth taxpayers in these states should be on the lookout for new tax plans and proposals designed to target their income.
Wealth taxes have been hotly debated and contested for years. Recently, former Democratic presidential candidates Elizabeth Warren and Bernie Sanders promoted federal wealth taxes during their primary campaigns. Democratic presidential candidate Joe Biden's tax plan would significantly increase taxes on those making over $400,000 annually, as well as increase payroll, income, capital gains and estate taxes.
Challenges continue during this COVID-19 environment, including safety, health and rapidly changing state taxes. In addition to potential federal tax changes, states should be monitored closely to determine whether any legislative actions are taken or may be taken to increase taxes, including the proposals noted in this Alert. Such federal and state changes may require prompt action from a planning perspective. As major legislative developments and opportunities emerge, we are always available to discuss the impact of new or pending tax law on your personal or business situation.
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Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.