…and discourage investment, charitable giving
The Vermont House Ways and Means (tax) Committee has discussed two ‘wealth tax’ bills aimed at more resourced Vermonters, the Vermont Chamber of Commerce reports in its Feb. 23 newsletter.
H.828 would seek to add a 3% surcharge to the incomes of Vermonters making more than $500,000. This proposal would affect roughly 3,500 taxpayers to bring in a combined revenue of about $75 million.
H.827 would seek to target individuals with a net worth of $10 million or more at a rate of 50% annual tax on unrealized gains or losses on their assets with a cap of 10% of the individual’s net assets exceeding $10 million.
Such legislation should be concerning for a myriad of reasons that apply to each of these proposals.
First, implementing and administering a mark-to-market tax system could be costly and complex. Complexities in valuing assets could create loopholes for wealthy individuals to avoid the tax, rendering this whole effort less fruitful with the state spending on the high cost of compliance without the corresponding revenues.
Setting aside that complexity, taxing unrealized gains would likely discourage investment, potentially harming economic growth and job creation. If not, it will also increase Vermont’s market volatility as investors sell assets to offset gains, potentially leading to market instability.
People are highly mobile now, especially after a pandemic that forced everyone to adapt, meaning some might flee the state for a lower tax regime.
Furthermore, the application of the law will be inequitable, given that some individuals are mobile while others are rooted. For example, a household of two advanced medical providers could have an income of $500,000 and not be able to legally live 6 months and a day out of state the way a household that owns an online business might.
Those leaving might be replaced. However, the person potentially replacing them does not have the same social ties to Vermont communities. This could have a considerable impact on charitable giving in the state as we lose philanthropic activity due to outmigration or due to the diminished capacity of high-net-worth individuals.
Finally, the constitutionality of taxing unrealized gains has not been definitively decided by the Supreme Court, which is currently considering a case, Moore v. United States, that could have implications for what is considered income and the legality of taxing unrealized gains under the 16th Amendment.
Furthermore, this decision will not address the constitutionality question about the lack of a due process of law surrounding this deprivation of property by taxing unrealized gains before they’re even realized through sale or other means.
This legislation is like Schrodinger’s cat in that it is alive and dead on arrival.
Generally, rank-and-file legislators understand the detrimental impact of such a proposal, and an overwhelming majority have rejected such a proposal in recent sessions.
However, it is also a year in which the legislature is facing massive structural deficits on top of a loss of federal funds, an increase in costs, and an unforced error in property taxes due to Act 127, the per pupil weighting bill.
This gap of $243+ million, with no easy solution to fix it and a legislative ethos and dogma that does not allow any cuts, means that even the most reasonable legislators might be swayed by their progressive peers to pass such a tax.
(Lightly edited bill analysis from the February 23 Lake Champlain Chamber Advocacy Update.)