A bill has been introduced in the state house of representatives that would impose a 1 percent wealth tax on financial assets held by the state’s wealthiest residents. This bill, house bill 1406, received a hearing before the house finance committee on Tuesday. The text of the bill is here. The fiscal note for the bill is here. TVW video of the hearing is here, beginning at 44:30.
Formally the wealth tax would be a property tax, separate from the state’s existing property tax. The wealth tax’s 1 percent rate is the maximum regular property tax rate allowed by the state constitution. Financial assets such as bank accounts, stocks, bonds, and ownership interests in partnerships and limited liability companies are exempt from the existing state local property taxes under the general exemption for intangible personal property, RCW 84.36.070. This exemption would not apply for the proposed wealth tax.
The tax would apply to “worldwide wealth” defined as “the fair market value of all intangible assets, or portion thereof, owned or controlled by” a natural person, with certain exemptions:
- All nonfinancial intangible assets, such as patents, copyrights, trademarks, reputation and sports franchises
- Up to $1 billion of financial assets
- Debt obligations of the U.S. government and of various corporations and associations established by Congress, for example the Federal National Mortgage Association
- Debt obligations of Washington state and the state’s local governments.
Married couples and domestic partners would be required to file jointly and would receive a single $1 billion exemption.
The fiscal note estimates that the tax would generate $4.95 billion during the 2023–25 biennium and $4.83 billion during the 2025–27 biennium. It’s hard to have much confidence in these estimates.
Since no U.S. state has ever levied such a tax, the authors of HB 1806 could not simply crib from another state’s existing law. Lacking such a road test, it is thus quite possible that the law will not operate in the way they expect it to.
A major difficulty in implementation of a wealth tax is determining the actual wealth of the taxpayer. State income taxes and the estate taxes have similar difficulties. However, when a state imposes an income tax or an estate tax, it is able to piggyback on the federal versions of these taxes, effectively outsourcing much of the enforcement effort. The state will not be able to outsource enforcement for the proposed wealth tax.
During the recent presidential campaign, Elizabeth Warren advocated a national wealth tax. The economist Larry Summers was highly skeptical of the practicality of her proposal. He estimated that the wealthy avoid paying estate tax on about 60 percent of their wealth and that “the myriad ways wealthy people avoid paying estate taxes … in some form will be applicable in any actually legislated wealth tax.” See this Washington Post op-ed by Summers, and you can watch Summers’s scathing comments at this event on wealth taxes at the Peterson Institute (starting at 20:20).
Jared Walczak at the Tax Foundation worries (here) that some of our billionaires would respond to the tax by moving their primary residences (domicile is the technical term) to another state and then spending less than one half of any year in Washington state. This would allow them to escape the tax. I share his worry.
As noted above, a person’s worldwide wealth extends to assets that they control even if they do not formally own those assets. The bill defines control
For purposes of this subsection:
(i) “Control” means a person possesses, directly or indirectly, alone or with one or more close associates, more than 50 percent of the power to sell or otherwise dispose of intangible assets.
(ii) “Close associates” means natural persons who are in close association with another natural person by reason of a family, marital, personal, or business relationship.
This suggests that the funders of private foundations (such as the Gates Foundation) would be personally taxed on assets held by their foundations.
Another problem is that our state constitution requires all taxes to “be uniform upon the same class of property.” (It was this provision that the 1933 state Supreme Court cited in ruling a progressive income tax to be unconstitutional.) The wealth tax’s $1 billion exemption would seem to be a pretty clear violation of uniformity. The fiscal note acknowledges there is “risk that the courts would invalidate the wealth tax on the grounds that it … conflicts with the uniformity provisions of …” the state constitution.
I doubt the court would invalidate the whole bill, as it includes this severability clause:
Sec. 14. SEVERABILITY CLAUSE. If any provision of this act or its application to any person or circumstance is held invalid, the remainder of the act or the application of the provision to other persons or circumstances is not affected.
Given this, the most likely outcome would be for the Court to throw out just the $1 billion exemption, leaving in place a wealth tax for all. Uh-oh.