Sen. Ron Wyden, D-Ore., speaks during a Senate Finance Committee nomination hearing for Deputy Treasury Secretary nominee Adewale Adeyemo on Feb. 23, 2021.
Greg Nash | Pool | Reuters
As Democrats wrestle over how to pay for their social spending package, a proposal to tax the wealthiest Americans has emerged. However, if the plan survives pushback from other party members, it may still face legal obstacles, experts say.
Senate Finance Committee Chairman Ron Wyden, D-Ore., on Wednesday unveiled a plan for a tax on billionaires — affecting Americans with more than $1 billion of wealth or adjusted gross income exceeding $100 million for three consecutive years — according to the proposal.
Billionaires may owe annual levies on asset growth, such as stocks and bonds, regardless of when they sell, known as “mark-to-market.” And non-tradeable assets like real estate, which are harder to value every year, may see a “deferral recapture” charge upon sale.
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However, the proposal may have challenges beyond Democratic votes, with opponents arguing parts of the plan may be unconstitutional.
“Invalidating the billionaire mark-to-market tax would not be shocking,” said University of Chicago Law School professor Daniel Hemel. “There are plausible arguments that the [Supreme Court] Justices could make with a straight face.”
For example, the courts may need to decide if asset growth, known as “unrealized gains,” is income, which is taxable under the 16th Amendment.
Invalidating the billionaires’ mark-to-market tax would not be shocking.
Daniel Hemel
University of Chicago Law School professor
But the bigger issue may be the definition of billionaire and net worth calculation, Hemel said, because if it’s a “direct tax,” it needs to be apportioned, or split up among states based on population, and isn’t possible since some places don’t have billionaires.
“I would characterize the landscape here as a lot of uncertainty about whether or not this would pass constitutional muster,” said Tax Foundation senior policy analyst Garrett Watson, pointing to similar ambiguities, along with issues of tax avoidance if enacted.
However, Wyden insists the plan is constitutional because it calls for “annually taxing income from capital gains” — a concept that’s already part of the tax code.
“Given that this approach is already in use in existing parts of the tax code, I can’t imagine the Supreme Court wants to give the wealthiest people on earth billions in tax cuts, particularly at a time when so many Americans are losing faith in the Supreme Court,” he said in a statement.
Although Wyden’s proposal doesn’t require Republican support, it needs votes from every Democratic Senator and nearly every Democrat in the House to advance.
Sen. Joe Manchin, D-W.Va., expressed concerns about the billionaire tax on Wednesday. However, it’s unclear whether he may eventually support the plan. And Democrats also need a vote from Sen. Kyrsten Sinema, D-Ariz., who has pushed back on other tax hikes.
Moreover, House Ways and Means Committee Chairman Richard Neal, D-Mass., doesn’t support the plan, but may reconsider with 50 votes from Senate Democrats.
Meanwhile, the party is also weighing a surtax on millionaires making more than $10 million, a corporate minimum tax and increased bank reporting.
CNBC’s Ylan Mui contributed to this story.
