Beware of State Efforts to Tax the Wealthy
Episode 221 – Several states are seeking to do what the federal government has failed to do thus far, and that is to increase taxes on the wealthy and high-income earners.
Transcript of Podcast Episode 221
Hello, this is Bill Rainaldi with another edition of Security Mutual’s “SML Planning Minute.” In today’s episode, “Beware of State Efforts to Tax the Wealthy.”
Much of the Congressional activity, in 2021 focused on increasing taxes on the wealthy because of a perception that they were not paying their fair share of taxes. The Build Back Better Act proposal was a massive effort to impose significant taxes on the wealthy including raising income and capital gains taxes on individuals making more than $450,000 per year; tax surcharges on those making more than $5 million per year; drastic changes to many estate planning and wealth transfer strategies to inhibit the wealthy from minimizing estate and gift taxes; eliminating favorable retirement planning strategies that would reduce income taxes; and many other proposals aimed at increasing taxes on the wealthy. However, 2021 ended without any agreement on the proposal due to disagreements within the Democratic party which controlled the Presidency and both Houses of Congress.
In 2022, efforts to pass the Build Back Better Act effectively died. In its place, the Inflation Reduction Act of 2022 was passed, which made many changes to help Americans increase retirement savings, but which had few provisions aimed at increasing taxes on the wealthy.
In 2023, the Republicans regained control over the House. Because of that, few pundits are expecting any significant tax legislation this year. Individual states, however, have decided to take matters into their own hands. As of this episode, at least seven states have introduced legislation aimed at increasing taxes on the wealthy. This follows on the heels of the new Massachusetts “millionaire’s tax” passed late last year but effective in 2023, imposing an additional 4% income tax on those making over $1 million per year. These seven states include New York, California, Connecticut, Hawaii, Illinois, Maryland and Washington.
The various state proposals run the gamut from increasing the highest state income tax rates; implementing or increasing capital gains tax rates based upon level of income; establishing a mark-to market tax based upon asset levels (i.e., end of year asset values will be taxed as if they were sold if the aggregate values exceed a certain threshold such as $1 billion sometimes referred to as “wealth tax”); creating a surtax on capital gains for individuals over certain income thresholds; increasing corporate tax rates; and more.
Unlike the Massachusetts millionaire’s tax, legislation in all of these other states are only at the proposal stage. Yet it is clear that these state legislatures and governors are intent on doing what the federal government has failed to do thus far, and that is to tax the wealthy because of the perception that they are not paying their fair share of taxes.
If and when these proposals are enacted into law, planning strategies to minimize these taxes could be helpful to high-income and high-net-worth residents in those states. So, residents need to keep a watchful eye on state legislative developments.
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