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States Look to Expand Opportunity by Taxing More Wealth, High Incomes

February 27, 2020 at 3:45 PM

Responding to extreme wealth concentration, states are considering taxing the assets of the very wealthy — such as stocks, bonds, real estate, boats, and jewelry — more heavily while closing loopholes and ending other special tax benefits that shield many of these assets and other income from state and local taxes.

America’s wealth is concentrated in the hands of a relative few. The top 1 percent of households owns roughly 40 percent of the wealth, while the bottom 90 percent owns just 21 percent. This reduces opportunity for millions of families — particularly Black and Latinx families and other families of color, which have faced barriers to building wealth due to the legacy of historical racism and the ongoing damage from racial bias and discrimination. State tax systems have contributed to wealth concentration, as wealthy individuals and corporations used their power to shape state tax policies to their own benefit. But better state tax policies can be a powerful tool for sharing prosperity more broadly.

State and local governments depend mainly on income, sales, and property taxes. And most states’ overall tax systems are regressive, asking the most of taxpayers who can least afford it. States can address the problem by expanding their taxes on wealth and high incomes.

Capital gains taxes. Several states are considering strengthening their taxes on capital gains — the profits an investor realizes when selling an asset that’s gained value, such as a stock, mutual fund, real estate, or artwork.

  • The handful of states that tax long-term capital gains at lower rates than ordinary income could scale back those preferences. New Mexico used to tax only 50 percent of capital gains but, last year, raised that share to 60 percent. This year, New Mexico’s House of Representatives passed a bill to further scale back this preference and use the savings to expand the state’s earned income tax credit for working families, though the bill didn’t advance in the Senate.
  • Most states tax capital gains at the same rate as wages and could raise their capital gains taxes. Maryland’s House Ways and Means Committee is considering a 1 percent surtax on capital gains income, with the resulting revenues used to boost state support for K-12 education. The Connecticut legislature’s Progressive Caucus agenda includes a plan to shift some of the responsibility for taxes in the state from low- and middle-income taxpayers to the wealthy by raising tax rates on capital gains and very high wages to finance a new child tax credit and an expanded earned income tax credit.

Estate taxes. State taxes on inherited wealth apply only to the wealthiest individuals and are the main way that states directly tax wealth. Policymakers have weakened federal and state estate taxes in recent years; the federal tax now reaches fewer than 1 in 1,000 estates, and state estate taxes are increasingly rare. But some states are taking a different path.

  • Maine legislators are considering a proposal to expand the estate tax by lowering the estate tax exemption to $2 million in value from the current $5.8 million.
  • Maryland is also considering reversing prior estate tax cuts by lowering its exemption from $5 million to $1 million as part of the plan to strengthen state support for K-12 education.
  • The Connecticut Progressive Caucus agenda (cited above) also calls for freezing the estate tax exemption at $3.6 million — rather than letting it keep rising each year until it reaches the federal exemption level of $11.4 million in 2023 — and removing a cap on the amount of estate tax owed.

States are considering other ways as well to require more from taxpayers who can most afford to pay.

New York, for example, is considering taxing billionaires’ capital gains each year rather than waiting until they sell the assets (as is the current practice); instituting a type of mansion tax on mostly vacant extra homes of the very rich; imposing higher income tax rates on multi-millionaires; restoring excise taxes on yachts and jets; and closing corporate tax loopholes that benefit the wealthiest. New York would use the additional revenue to help address a budget gap and to expand funding for education and housing for its residents who face the greatest barriers to success.

Similarly, other states’ efforts to reduce tax breaks on wealth and high incomes would help offset wealth concentration while raising revenues for key investments such as education and health care, and for income supplements such as state earned income tax credits that help families meet their needs.


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