Vermont becomes latest state to propose wealth taxes

Lawmakers in Vermont are introducing legislation this week that would impose new taxes on the state’s wealthiest residents, joining a growing national campaign being pushed by Democrats who believe that the measures will gain traction as states reckon with post-pandemic budget squeezes.

One proposal in Vermont would tax people with more than $10 million in net worth on their capital gains, even if the gains have not yet been realized. Another would add a 3% marginal tax on individual incomes exceeding $500,000 a year – a measure that supporters contend could pump $98 million, or almost 5% of the annual budget, into the state’s coffers.

To underscore the bills’ importance to the Democratic leaders who control the Legislature, both are being sponsored by state Rep. Emilie Kornheiser of Brattleboro, who chairs the Ways and Means Committee.

“The way our tax structure is set up, our middle class is carrying an undue burden, compared to folks at the top,” said Kornheiser, who plans to detail the legislation at a committee hearing Tuesday and a news conference Wednesday. “We want to make sure that all Vermonters are paying their fair share.”

The package of bills is part of a broader push across the country by progressive groups that hope that the political moment has arrived to shake up the tax system to address income inequality.

Called the Tax Justice Initiative, the campaign began in earnest a year ago, when legislators in seven states, including California, New York and Washington, coordinated the introduction of bills mirroring the federal wealth tax proposed by Sen. Elizabeth Warren, D-Mass., during her 2020 presidential campaign.

None of those proposals got out of committee. But this year, with Vermont, Pennsylvania and possibly other states joining the fold, organizers are redoubling their efforts to advance the bills to floor votes and then to passage. They hope that frustration over the escalating cost of living and resentment over the many breaks afforded to the ultrawealthy will coalesce into a political groundswell.

“We know it takes more than one single session for big ideas to take root,” said Jessie Ulibarri, a former Colorado state senator who is now co-executive director of the State Innovation Exchange, one of the groups pushing for the new bills along with the State Revenue Alliance. “Policymaking is the act of taking the impossible to the inevitable,” Ulibarri said.

Many Republicans and Democrats have long resisted expanding the state taxation of individuals beyond income to include assets as well, as some of the new bills propose. Doing so in an election year may be even less appealing.

Gov. Gavin Newsom of California recently rejected the idea of plugging the state’s $37.9 billion budget deficit with a wealth tax. Republicans say California’s progressive income tax system is already too onerous for high earners, and Newsom, who fashions himself a fiscal centrist and is widely believed to have presidential aspirations, has resisted adding new state taxes.

Texas voters overwhelmingly passed a constitutional amendment in November that would preemptively ban any future efforts by the state to tax wealth or net worth.

Democrats in Vermont have a supermajority in the state Legislature, but even so, they also face a difficult sales job. Gov. Phil Scott is a moderate Republican who voted for President Joe Biden in 2020 and delivered his budget address Tuesday; though the state is likely to face a tightening budget, Scott has been cool to suggestions that the wealthy be taxed more.

“We have a pretty progressive tax policy in the state here already,” he told reporters in November. “I’m not sure how many more of the wealthy there are and how much more we’re going to reap from them without them moving.”

Still, when it comes to taxes, the biggest frustration many Americans have is the sense that the wealthiest aren’t paying their fair share: 82% of respondents in an April 2023 Pew Research poll said it bothered them, including 60% who said it bothered them “a lot.”

Some of the ultrawealthy agree: More than 250 billionaires and millionaires, including heirs to the Rockefeller and Disney fortunes, recently signed an open letter, coinciding with the World Economic Forum in Davos, Switzerland, that urged world leaders to tax them more.

The vast majority of state and local tax systems taken as a whole, including property, sales and excise taxes as well as income tax, are regressive, and the poorest 20% of taxpayers pay effective tax rates that are nearly 60% higher than those paid by the top 1% of households, according to new research from the Institute on Taxation and Economic Policy, a nonpartisan research organization that equates fairness with a progressive tax system.

So far in 2024, lawmakers in 10 states have introduced wealth tax bills or are working on introducing them, according to Amber Wallin, senior policy and outreach director at the State Revenue Alliance. They are California, Connecticut, Hawaii, Maryland, Minnesota, Nevada, New York, Pennsylvania, Vermont and Washington.

No states currently assess any taxes on a living individual’s net worth or unrealized capital gains. If Vermont’s bill were to become law, it would basically do that, Kornheiser explained: Someone whose assets, after exemptions, started the year worth $10 million and finished the year worth $11 million, for example, would have $1 million in unrealized gains that would be counted as income, and therefore subject to Vermont’s top income tax rate of 8.75%, even though nothing was sold and the gains were all on paper.

Whether any of these state proposals, if enacted, would withstand legal scrutiny remains to be seen. The Supreme Court is now weighing a case that could redefine what constitutes income and potentially complicate efforts by lawmakers to impose levies on billionaires’ wealth.

Proponents in Maryland spent $250,000 in ad campaigns at the end of last year to bolster support for proposals that they contend could produce $1.6 billion in annual revenue.

In Connecticut, whose legislative session does not start until Feb. 7, lawmakers are preparing to unveil updated proposals, said state Rep. Kate Farrar, deputy leader of the Democratic majority in the House, who represents the West Hartford and Newington areas. One new proposal tackles something that federal lawmakers have failed to do: closing the carried interest loophole, which allows hedge fund and private equity executives to pay tax rates that are lower, in some cases, than those paid by entry-level employees.

Some legislators and taxpayers are pushing back.

In the state of Washington, conservatives hope they have collected enough valid signatures to ask voters in November whether the state’s capital gains tax should be repealed. The tax, which was approved by the Democratic-controlled Legislature in 2021, assesses a 7% excise tax on realized capital gains of more than $250,000, excluding real estate, and generated $900 million in revenues in 2023.

“There’s still a lot of economic unease across the country, and there’s a populist mood in the U.S. right now on both the right and the left that can help drive some of these conversations,” said Jared Walczak, vice president of state projects at the Tax Foundation, a nonprofit tax policy group which has criticized wealth tax proposals.

“The problem is that feelings can make for very bad policy,” he said. “It may feel good to increase taxes on the very wealthy, but that may mean they no longer have the capacity to invest in growing companies that generate employment and create opportunity in this country.”