On Thursday, January 19, New York and Connecticut lawmakers, along with lawmakers from California, Hawaii, Illinois, Maryland and Washington, introduced tax laws targeting wealthy taxpayers. The pending proposals are similar to those promoted by Massachusetts Sen. Elizabeth Warren during her 2020 presidential campaign and were funded by Fund Our Future, a tax policy advocacy group.
The New York proposal aims to increase capital gains rates and complement existing bills introduced earlier this month and into 2021, summarized briefly below.
I. Senate Act 2162introduced on January 19, proposed an additional tax on long-term capital gains, dividends or any other type of capital gains from:
I. 7.5% for jointly filing married individuals, surviving spouses, and heads of household with taxable income over $500,000;
ii. 15% for jointly filing married persons, surviving spouses and heads of household with taxable income over US$1 million;
iii. 7.5% for singles, married couples filing separate applications, and estates and trusts with taxable income over $400,000; and
IV. 15% for singles, married couples filing separate applications, and estates and trusts with taxable income over $800,000.
II. Senate bill 1570introduced January 12, proposed a mark-to-market tax for New York residents with net worth of $1 billion or more at the end of each tax year beginning in 2023.
I. Gains or losses would be recognized as if each asset owned by an individual were sold at its fair value on December 31, 2022.
ii. Any net gain from these deemed sales would be included in taxpayer income for 2023 up to a “phase-in-cap” amount.
iii. At the taxpayer’s option, the tax payable may be paid for the current tax year or in 10 equal annual installments together with a “deferral fee”.
IV. Thereafter, each year, a deemed sale of assets by a person with net worth of at least $1 billion would be
III. Senate Act 3462 (Convention Act 4643A), introduced in January 2021, proposed introducing separate taxes on inheritance and gift income, changing the calculation of inheritance tax and introducing a gift tax. These proposals were referred to the New York Legislature’s Ways and Means and Budget and Revenue committees in January 2022 with no further action.
Two separate Connecticut bills propose raising marginal tax rates, introducing a capital gains surcharge, and restructuring certain taxes as follows:
- Invoice 774 suggested:
I. Raising the top two marginal tax rates on personal income to 7.49% and 7.20%; and
ii. Introduce a 1% and 0.75% surcharge on the net gain on the sale of investments by Connecticut taxpayers in the top two income brackets.
- Invoice 351 suggested:
I. Create a 5% surcharge for taxpayers in the highest income bracket on income from net gains on the sale or exchange of a capital asset, dividend income and interest income;
ii. Implementing a 10% tax on the annual gross revenue of companies with more than $10 billion in annual gross revenue from digital advertising services;
iii. Waiver of a statewide property tax on commercial and residential properties valued at over $1.5 million;
IV. extending and raising the corporate tax rate from 7.5% to 11.5%;
v. Increase in corporate tax surcharge to 20%;
vi. hired 50 additional internal auditors and more wage enforcement officers; and
vii. Approved additional marginal tax rates for individuals with Connecticut taxable income greater than US$1 million (9.55%), US$10 million (10.25%) and US$25 million (10.65%).
Connecticut’s regulations also include those favorable to less affluent taxpayers, including a $500 refundable child tax credit (for up to three children), expanded and increased property tax credits, and a reduction in the marginal tax rate from 5.5% 5%
The Washington Post quoted a New York state senator as saying, “The point here is to make sure that what’s not being done at the federal level, we do at the federal level.” Taxation in the United States, where taxpayers would have to pay annual taxes on the asset and not the income. Passing such a law would almost certainly prompt wealthy taxpayers to consider relocating to lower tax jurisdictions and could pose constitutional challenges as well as practical issues such as the valuation of assets with unrealized gains.
While taxpayers in New York and Connecticut believe that proposals like these are unlikely to take effect now, they would do well not to rule out the possibility that these measures could become more important over time. As discussed here, Massachusetts, another Democratic state in the Northeast, recently passed a “millionaire tax” after six failed attempts to introduce a progressive tax system dating back over 100 years. So even if New York and Connecticut don’t pass the laws described above, the mere existence of such a law could herald the future.