Democrats are facing hurdles to making a new annual tax on billionaires’ investment gains a reality.
The proposal, championed by Senate Finance Committee Chairman Ron WydenRonald (Ron) Lee WydenOn The Money — Democrats craft billionaire tax with deal in reach Senators weigh future of methane fee in spending bill Senate negotiators homing in on proposal to tax billionaires MORE (D-Ore.), is seen as a way to help pay for the party’s social spending package while accommodating Sen. Kyrsten SinemaKyrsten SinemaOn The Money — Democrats craft billionaire tax with deal in reach Democrats face critical 72 hours Biden urges action on infrastructure bill alongside NJ’s Murphy MORE’s (D-Ariz.) opposition to raising tax rates.
But some Democratic lawmakers have expressed reluctance to including a new tax proposal in the package, and tax experts say there could be challenges in crafting its details.
“To try to get this tax regime right at the last moment, without public input, is daunting,” said Steve Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center, whose former director now works in the Biden administration.
Taxing billionaires’ unrealized capital gains annually, a concept known as “mark-to-market,” is gaining steam as an alternative given Sinema’s objection to raising rates on corporations and high earners. Currently, people do not pay taxes on capital gains until investments are sold.
Democrats need all 50 senators in their caucus to agree to get a measure through the Senate, where the party is using special budget rules that avoid a filibuster.
The mark-to-market proposal is expected to apply to about 700 taxpayers with more than $1 billion in assets or $100 million in income for three years in a row. Eligible households would have to pay taxes annually on gains of tradable assets such as stocks. For non-tradable assets, billionaires would have to pay a charge when they sell the investments, on top of capital gains taxes.
Wyden has been working on a mark-to-market proposal since 2019. He told reporters late Monday that he hopes to complete a proposal in the next few days. Biden has also expressed support for the idea. Supporters say it would help to prevent the wealthiest Americans from avoiding taxes.
“It would help get at capital gains, which are an extraordinarily large part of the incomes of the wealthiest individuals,” Treasury Secretary Janet YellenJanet Louise YellenThe No Surprises Act: a bill long overdue On The Money — Democrats craft billionaire tax with deal in reach Treasury hires former JPMorgan executive as first racial equity counselor MORE said Sunday on CNN.
Speaker Nancy PelosiNancy PelosiDemocrats face critical 72 hours Equilibrium/Sustainability — Presented by Southern Company — ‘Too late to evacuate’ after wildfire debris Greene fined a third time for refusing to wear mask on House floor MORE (D-Calif.) also said on CNN on Sunday that she expected the proposal to be included in the social spending package, and that it’s expected to raise $200 billion to $250 billion.
Sen. Joe ManchinJoe ManchinOn The Money — Democrats craft billionaire tax with deal in reach Democrats face critical 72 hours Overnight Health Care — Presented by Altria — Manchin nixes Medicare expansion MORE (W.Va.), who like Sinema is a key centrist Democrat, expressed openness to an annual tax on billionaires’ gains.
“I’m open to any type of thing that makes people pay that’s not paying now,” he said.
Some Democratic lawmakers, particularly in the House, have indicated that they would prefer to raise tax rates. The House Ways and Means Committee last month advanced legislation that would increase the top individual income rate from 37 percent to 39.6 percent, the top capital gains rate from 20 percent to 25 percent, and the corporate tax rate from 21 percent to 26.5 percent.
“The simplest thing to do is raise the rates. It’s more predictable, and I don’t think there’s any corporate taxpayer who is going to say ‘Well, I’m paying more taxes but at least they didn’t raise the rate,’ ” Rep. Dan KildeeDaniel (Dan) Timothy KildeeFormer Rep. Dale Kildee dies at 92 EPA closer to unveiling plan for tackling ‘forever chemicals’ Sanders, Manchin, Sinema fight proxy war in the House MORE (D-Mich.), a Ways and Means Committee member, said Friday.
Kildee said that alternatives such as taxing billionaires’ investment gains annually are “interesting ideas that might be helpful” but aren’t a good substitute for rate hikes.
House Democrats also said it could be a challenge to include the billionaire’s tax idea given that lawmakers haven’t thoroughly examined it.
“For it to be introduced in the eleventh hour when it’s a new, complicated concept for most members to wrap their head around, I just don’t know how realistic that will be,” said Rep. Ron KindRonald (Ron) James KindTwo House Democrats to retire ahead of challenging midterms Two senior House Democrats to retire Democratic retirements could make a tough midterm year even worse MORE (D-Wis.), another member of the Ways and Means Committee.
Frank Clemente, executive director of the liberal group Americans for Tax Fairness, predicted that Democrats would get behind the proposal.
“It is a change in the way to think about the tax system, but it’s a long overdue change,” he said.
But Republicans were quick to attack the idea.
“Our Democratic colleagues have become so tax hike happy that they’re throwing spaghetti at the wall to see what sticks,” said Senate Minority Leader Mitch McConnellAddison (Mitch) Mitchell McConnellBiden says he’s open to altering, eliminating filibuster to advance voting rights Pelosi says GOP senators ‘voted to aid and abet’ voter suppression for blocking revised elections bill Manchin insists he hasn’t threatened to leave Democrats MORE (R-Ky.).
Tax experts said that Democrats will need to be careful as they develop the details of the proposal. Challenges include figuring out how to value assets every year, how to treat investment losses and how to determine who is subject to the tax.
“It would be a new system of taxing gains for billionaires, and lawmakers should get it right if they’re going to do this,” said Kyle Pomerleau, a senior fellow at the right-leaning American Enterprise Institute.
There are also questions about whether the Supreme Court would uphold as constitutional an annual tax on billionaires’ unrealized gains. Those who expressed constitutional concerns pointed to a Supreme Court opinion from 1920 that found unrealized gains weren’t income under the 16th Amendment.
Joseph Bishop-Henchman, vice president of tax policy and litigation at the right-leaning National Taxpayers Union Foundation, said that proponents of the tax on billionaires’ unrealized gains “acknowledge there’s no clear precedent saying Congress could do this.”
Some legal experts expressed support for raising taxes on the rich but think other options are less likely to be shot down by a conservative Supreme Court.
“I think they should win, but this approach puts the Democrats’ tax plans in the hands of six conservative Republican-appointed Supreme Court justices,” said University of Chicago law professor Daniel Hemel.
Other law professors said the 1920 opinion has effectively been overruled.
“It would be a big mistake for the Supreme Court to revive this problematic and largely overruled opinion,” said Ari Glogower, a law professor at Ohio State University.
David Gamage, a law professor at Indiana University who has worked with Wyden’s office, said that “for at least 30 years, most scholars and the major treatises have agreed that a comprehensive mark-to-market reform is constitutionally safe.”
“The Wyden proposal is even safer than that, because it just applies mark-to-market to publicly traded assets, which there’s even stronger constitutional precedent in favor of,” he said.
Gamage added that even if the tax proposal were challenged on a technicality, Congress would be able to easily fix any constitutional issue, such as by making changes in a subsequent bill.
Wyden noted that mark-to-market accounting is already used in other areas of the tax code.
“Given that this approach is already in use in existing parts of the tax code, I can’t imagine the Supreme Court wants to give the wealthiest people on earth billions in tax cuts, particularly at a time when so many Americans are losing faith in the Supreme Court,” he said in a statement.