While lawmakers have a growing interest in taxing the ultra-rich, last week’s Supreme Court ruling could threaten future wealth tax proposals, experts say.
In Moore v. United States, the Supreme Court blocked a challenge to the “mandatory repatriation tax,” a one-time levy on certain foreign investments enacted in 2017.
The case centered on a U.S. couple who incurred about $15,000 in taxes on undistributed profits from an overseas company. The Moores argued the levy violated the 16th Amendment because they didn’t “realize” or receive income.
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Many tax experts watched the Moore case to gauge Congress’ authority to tax unrealized earnings, which could have an impact on wealth tax proposals. But the Supreme Court didn’t comment directly on the issue.
“Nothing in this opinion should be read to authorize any hypothetical congressional effort to tax both an entity and its shareholders or partners on the same undistributed income realized by the entity,” Justice Brett Kavanaugh wrote in his majority opinion.
Still, the 83-page ruling scattered some clues about whether certain versions of a wealth tax could pass constitutional muster, experts say.
Issues with wealth tax proposals
In concurring and dissenting opinions, four justices — Amy Coney Barrett, Samuel Alito, Clarence Thomas and Neil Gorsuch — said the 16th Amendment requires realization for taxes. One more justice could create a majority in future cases.
That could be a roadblock for Biden’s billionaire tax, which calls for a 25% tax on unrealized gains for households with wealth exceeding $100 million, experts say. Biden also included a billionaire tax in his 2023 and 2024 budget proposals, but the plan hasn’t gained broad support.
No billionaire should pay a lower federal tax rate than a teacher, a sanitation worker or a nurse.President Joe Biden
“No billionaire should pay a lower federal tax rate than a teacher, a sanitation worker or a nurse,” Biden said during the State of the Union, where he renewed his proposal. He also briefly mentioned the plan during the first presidential debate on Thursday.
However, the Supreme Court opinions and Biden’s proposal “seem like they’re probably on a collision course,” said Alan Cole, senior economist with Tax Foundation’s Center for Federal Tax Policy.
Of course, the future of Biden’s tax proposal is unclear with uncertain control of Congress.
Plans ‘on the wrong side of the constitutional line’
Federal wealth taxes drew national attention during the 2020 presidential primaries when Sens. Elizabeth Warren, D-Mass., and Bernie Sanders, I-Vt., released dueling proposals. Senate Finance Committee Chairman Ron Wyden, D-Ore., has also proposed a similar tax on billionaires.
The issue is whether wealth tax proposals count as a “direct tax,” which must be apportioned, or split, among the 50 states based on their percentage of the total U.S. population, according to the Constitution.
That’s a barrier because “no taxes are ever apportioned,” said Steve Rosenthal, senior fellow at the Urban-Brookings Tax Policy Center. ”It’s impossible.”
At oral arguments for the Moore case in December, Solicitor General Elizabeth Prelogar said a wealth tax would need to be apportioned among the states, which Rosenthal said “essentially threw the Warren and Sanders wealth tax under the bus.”
What’s more, Kavanaugh’s majority opinion, which “analytically divides direct and indirect taxes” and referenced Prelogar’s comment, could put the wealth tax proposals from Warren and Sanders “on the wrong side of the constitutional line,” Rosenthal said.
It’s not clear whether the Biden and Wyden proposals, which use so-called “mark-to-market” or yearly taxes of capital gains, would be constitutional either, experts say.
Wyden has insisted his plan is constitutional because annually taxing capital gains is already part of the tax code.
The high court opinion “will open up the floodgates to much more litigation,” Rosenthal added.