Taxing the Wealthy: A Brief Overview of Recent State Proposals

Updated as of March 29, 2023. Joe Biden released his 2024 Federal Budget proposal which included a similar “billionaire wealth tax” as the prior year’s. This was not expected to be codified into law. The state laws remained in the proposal stage.

In recent years, the idea of a wealth tax has gone from being a fringe policy proposal to a mainstream topic of debate in the United States. The idea was popularized during the 2020 presidential campaign by Senator Elizabeth Warren, who called for a 2% annual tax on household net worth above $50 million, and a 3% tax on net worth above $1 billion.

Last year, the Biden Administration and the Department of the Treasury issued a formal proposal for its 2023 Federal Budget, which included a proposed “billionaire wealth tax.” The proposal applied the tax to individuals with net worth in excess of $100 million and would have applied a 20% tax rate to income including unrealized capital gains. However, this proposal did not make it into the final budget.

Recently, multiple states simultaneously proposed taxes aimed at addressing income inequality. Those included wealth taxes in California, Washington, and Illinois.  In light of the proposed state bills and the growing importance of accurate business valuation, it is critical for high-net-worth individuals and business owners to have a trusted partner to guide them through the complex valuation process.

The proposed California bill, if passed, would impose an annual tax of 0.4% on a taxpayer’s worldwide with net worth exceeding $30 million. The proposed tax would be on top of California’s existing 13.3% income tax, currently the highest in the nation. The tax would not apply to real property used as a primary residence, tangible personal property, and certain business interests.

Washington State proposed a similar bill, which would impose a 1% tax on a taxpayer’s worldwide net worth exceeding $1 billion, or $500 million for unmarried individuals. The proposed tax would be on top of the state’s existing 0.9% business and occupation tax, and it would not apply to certain assets such as retirement accounts, certain real estate, and property owned by Native American tribes.

The proposed Illinois bill would apply a 1% tax rate to individuals with a net worth exceeding $10 million and 1.5% to those with a net worth exceeding $100 million. The tax would apply to Illinois residents, regardless of where their wealth is located, and it would not apply to certain assets such as retirement accounts, primary residences, and assets used in a trade or business.

The proposed wealth taxes highlight the importance of accurate business valuation for high-net-worth individuals. The value of a business can significantly impact an individual’s overall net worth, and inaccurate valuations can lead to overpayment or penalties for underpayment of taxes. Inaccurate valuations can also result in legal and financial consequences. With the potential implementation of wealth taxes, it is more important than ever for high-net-worth individuals to obtain accurate business valuations to ensure they are not overpaying taxes or incurring penalties.

While these proposals face numerous political, legal, and constitutional hurdles, they highlight a continued trend of mainstream attempts to codify wealth taxes. A wealth tax has the potential to raise significant revenue but also presents challenges in terms of implementation and enforcement. Taxpayers with high net worth should consider consulting with tax professionals and financial advisors to ensure they are taking advantage of all available planning opportunities.

At DeJoy, our team of experienced valuation professionals has a proven track record of delivering comprehensive, reliable, and defensible valuations that can help businesses and individuals make informed decisions. Whether you’re looking to sell your business, transfer ownership to the next generation, or navigate tax implications, DeJoy’s valuation practice can provide you with the insights and expertise you need to achieve your goals.