Supreme Court Could Potentially Obstruct a Federal Wealth Tax

The Supreme Court accepted a case on Monday that could potentially obstruct Congress’ ability to pass a federal wealth tax, which is a significant policy proposal for the Democratic party. The court rules favor the plaintiffs; establishing the wealth tax could be difficult. Notably, the plaintiffs strongly recommended the court oppose the proposition.

The upcoming Supreme Court case, Moore v. United States, challenges a tax levy enacted through President Donald Trump’s 2017 tax overhaul. The case reevaluates the law’s description of income. This case may have broad implications for the U.S. tax code and federal wealth tax proposals. The court ruling could invite litigation about Congress’ approach to taxing pass-through entities and affect future corporate tax revenue. It’s a complex case with far-reaching implications beyond the current legal issue.

Supreme Court will decide whether Congress can tax wealth https://t.co/C01uHQMqpn

— Los Angeles Times (@latimes) June 26, 2023

Biden Administration and Democrats Proposed Tax

Biden administration and the Senate Democrats are close to reaching a new “billionaire tax” deal to fund their stalled spending programs. This tax will apply yearly to increase the value of stocks and other assets taxpayers hold with a net worth of $1 billion or more. However, the current Supreme Court considers this tax unconstitutional, which is predominantly conservative.

Section 2 of Article 1 in the direct tax clause outlines the constitutional issue with the billionaire tax. According to this clause, direct taxes are distributed among the states based on their respective populations. If the billionaire tax is considered direct, it would be impossible to apportion it properly, as some states have no known billionaires. The definition of a direct tax has never been crystal clear. While some earlier Supreme Court opinions suggest that direct taxes may be limited to land and head taxes, the controversial 1895 case of Pollock v. Farmers’ Loan & Trust Co. expanded the definition to include taxes on real and personal property. The 16th Amendment in 1913 later partially corrected this decision, which exempted “taxes on incomes” from the apportionment requirement.

The Biden administration has proposed a billionaire minimum tax to achieve tax code fairness and to generate additional revenue. According to the administration, they expect to raise $360 billion in ten years. It is important to note that this tax would only apply to the top one-one hundredth of one percent (0.01%) of American households, specifically those of billionaires. The White House further mentioned that more than half of the revenue generated from this tax would come from households with a net worth exceeding $1 billion.

The Supreme Court May Ban a Wealth Tax

Opponents of the proposed wealth tax argue that it relies on unrealized gains and a taxpayer’s wealth, making it a tax on wealth rather than income. Suppose it falls into the category of a wealth tax. In that case, the court will allocate this among the states based on population. This is currently impossible due to the geographic distribution of billionaires.

While defenders of the billionaire tax could argue for the repeal of Pollock to address this issue, there would still be concerns about the tax’s reliance on the value of a taxpayer’s land. The Supreme Court has consistently held that taxes on land are direct taxes that must be apportioned. However, the current Supreme Court is not likely to uphold the tax, as seen in previous decisions striking down progressive legislation such as the Obamacare Medicaid expansion, the Violence Against Women Act, and Section 5 of the Voting Rights Act.

To mitigate the constitutional challenge, Democrats could draft the billionaire tax as constitutionally sound as possible. They could separate the tax components for real property and personal property in different sections of the legislation. Then include a “severability” clause, ensuring that if one part is invalidated, the rest of the statute remains intact. This way, if the court returns to the pre-Pollock understanding of direct taxes, the bulk of the billionaire tax can still stand.

Alternative Constitutionally Secure Options

Passing the billionaire tax and challenging the Supreme Court to strike it down is one option for Democrats, as the court’s composition may change through litigation. However, alternative constitutionally secure options for progressive tax reform include:

• Raising rates on high-income earners and corporations.
• Ending tax-free stepped-up basis at death.
• Closing loopholes in partnership and trust tax laws.

Democrats have a unique opportunity to enact meaningful tax reform and should consider these options.

Ultimately, if the Democrats choose to pursue the billionaire tax and the Supreme Court strikes it down, conservative justices may bear some responsibility. However, the Democratic lawmakers who pushed for this measure will also share the blame for wasting an opportunity for meaningful tax reform.

Written by Janet Grace Ortigas

Sources:

TNR: The Supreme Court May Preemptively Ban a Federal Wealth Tax; by Matt Ford
Yahoo! News: Supreme Court will decide whether Congress can tax wealth; by David G. Savage
Indiana University Bloomington: Why a Federal Wealth Tax is Constitutional; by Ari Glogower, David Gamage, and Kitty Richards
The Washington Post: A wealth tax is a good idea — if we had a different Supreme Court; by Daniel Hemel
CNBC: Here’s what a new Supreme Court case could mean for federal wealth tax proposals; by Kate Dore

Featured and Top Image by Mark Thomas from Pixabay – Creative Commons License
Inset Image by Pictures of Money Courtesy of Flickr – Creative Commons License