States across the country are facing budget shortfalls. While some are tightening their belts, others are looking for untapped wealth to shore up state coffers.
While it’s one thing to prove the top 1% have resided in-state long enough to tax them, taxing hundreds or thousands of possible residents is proving to be another entirely.
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States like California, New York, Washington, Hawaii and others have implemented or are attempting to implement a form of a wealth tax. While the strategy may be different, they’re all running into that same issue.
The why
There are a number of reasons states are turning down this path to bring in extra cash.
For one, state tax revenue has grown increasingly volatile, especially since the COVID-19 pandemic produced large swings in collections. That was driven by temporary factors like federal pandemic aid, changes in consumer spending, a delayed 2020 tax-filing deadline, along with high inflation, wage growth and more.
States also cannot print money and run on deficits like the federal government.
“States need to find more creative ways to raise revenue because the contribution from the federal side is decreasing,” Samuel Brotman, director of legal at Brotman Law, told Straight Arrow.
States are getting less federal support and more federal cost-shifting, especially since the height of the pandemic. With COVID-19 funds running nearly dry and the Trump administration’s insistence on states shouldering more of the financial burden, federal grants as a share of state revenue have fallen 2.5% in recent years.
The how
Politicians point to the country’s growing wealth gap to look for extra money from the people who have it.
“No other democracy has this kind of disparity that we have in the U.S.,” Richard Pomp, law professor at the University of Connecticut Law School, told Straight Arrow.
None more so than California, which boasts the most billionaires in the country. In November, Californians will decide whether the richest among them must pay a one-time 5% tax on their entire net worth, not just yearly income.
New York has taken a different approach.
While California is focused on net worth, New York’s new tax is aimed at properties. The proposed pied-à-terre tax would impose an annual tax on expensive homes in New York City being used as secondary residences.
Back on the West Coast, Washington state focused on income.
The new measure imposes a 9.9% tax on Washington taxable income above $1 million. It will take effect Jan. 1, 2028.
The issue
No matter what method is used to implement some form of wealth tax, some of the issues remain the same. Most notably, whether a resident is a resident or just visiting. Proving so can mean millions of dollars.
“Most of them all have the same underlying factors and situations that they look to,” Marisa Friedrich, director of the tax resolution and advisory group at Kaufman Rossin, told Straight Arrow. “Where’s your home? Where are you spending time? Where’s your family? Where are your things?”
It’s essentially a question of where the person really lives. That can, at times, be difficult to prove.
“Determining which of those homes is your primary residence is actually somewhat complicated,” Tim Noonan, a state and local tax attorney at Hodgson Russ in New York, told Straight Arrow.
Many wealthy people own homes in multiple states. Others who may have bought a Brooklyn flat back when the Mets were winning pennants before heading to Boca Raton are fair game.
It comes down to the concept of domicile, meaning a person’s permanent home even if they spend significant time elsewhere.
Another question becomes whether it’s on the state or the taxpayer to prove residency. It’s always a bit on both, and which way it leans depends on the state.
In California, experts say it’s mostly on the taxpayer.
“If a taxpayer says, ‘I moved from California to Texas,’ the burden’s on the taxpayer to prove it,” Noonan said. “You’re almost guilty until you can prove yourself innocent.”
In California, several billionaires have publicly fled to states like Florida where they don’t have to deal with a wealth tax. They will need to prove their new home is not in the Golden State.
“If you want to change that domicile, you have to move your substantial ties to the other place and show that they are stronger in the new domicile, and no longer strong in California,” Friedrich said. “However, California has a presence test as well. If you’re present in the state for more than nine months, 270 days, you’re considered a resident.”
In Washington, the burden mostly lies with the state since they are using income tax returns. If a person claims on their filing that they’re a nonresident, then the state has to prove that’s not accurate.
The state has even acknowledged this is going to be a “significant lift.”
“The state will make its arguments, and then the taxpayer will respond,” Pomp said. “So, it’s going to be burdensome for both people, but in terms of the procedure in the first round, they have to show their cards by filing a non-resident return, and then the state challenges.”
New York is somewhere in between.
There are five factors in that state to determine domicile changes, including business ties, time spent, family ties and more.
“It’s the burden of proof of this individual to show that they’ve left the state and they’re no longer domiciled in the state, and this is why I had an intent to leave, and I met all these factors, and therefore I’m no longer a domiciliary of New York,” Friedrich said.
Regardless, Noonan said, “it’s all based on a similar concept.”
What’s next?
One common thread is that this will be troublesome and potentially costly for the states. While wealthy people might have multiple homes, they also have resources to fight back.
“Taxpayers who have resources and good counsel, if they seek it, can definitely prove a move,” Noonan said.
These wealthy people often pay a good bit in either income tax or property tax, or both. Losing them as residents means losing those taxes, and if the state loses the fight over the wealth tax, it’s lost that revenue too.
New York City has had migration issues for some time.
That issue has also been at the heart of the battle over the billionaire tax in California and a reason some, including Gov. Gavin Newsom, oppose it.
“They have the resources to move to other states, and now significant reason for doing so,” Noonan said.
Newsom is considered a likely candidate to run for president in 2028. While he’s opposed that tax in his own state, he’s also floated the idea of a national wealth tax.
That would certainly impact this residency issue.
“If the feds were to adopt a wealth tax, it becomes a lot harder for anyone to evade because they have to leave the country,” Pomp said. “That’s a much more serious decision than simply moving from California to Nevada. The feds have much more resources and manpower at their disposal.”
However, experts all agreed that’s unlikely to happen anytime soon, especially under the Trump administration. Even if it did, it would likely be challenged in multiple court battles and over constitutionality.
“Given how the political machine works in Washington D.C., I don’t think there’s a lot of people that are pushing this enough, where there’s significant enough political pressure for them really to weigh in on this,” Brotman said.
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