An aborted Democratic plan to tax assets held by billionaires was vulnerable to attack on constitutional grounds, experts told the Washington Free Beacon.
The Constitution authorizes three forms of taxation, and tax-law gurus interviewed by the Free Beacon said the ill-fated billionaire's tax did not fit neatly in any of those categories. The measure would have taxed assets that appreciate in value year over year—like a stock or a closely held company—which aren't currently taxed until they're sold.
Senate Finance Committee chairman Ron Wyden (D., Ore.) on Wednesday morning unveiled the billionaire's tax to finance President Joe Biden's pricey social spending agenda. Prominent Democrats, including House Ways and Means Committee chairman Richard Neal (Mass.) and Sen Joe Manchin (W. Va.), quickly came out against the plan, assuring its demise.
Advocates believe the billionaire's tax would have raised $200 to $250 billion over the next decade. The Wyden plan applied to taxpayers with a net worth of $1 billion or those who report $100 million in income for three consecutive years. Wyden and Treasury Secretary Janet Yellen embraced the billionaire's tax after a handful of congressional Democrats came out against other, more straightforward revenue raisers, such as hiking the capital gains tax.
Tax experts who spoke to the Free Beacon say the Wyden plan could not be considered an income tax, since an increase in the value of a given asset isn't income as defined by law. Advocates counter that appreciating assets balloon a top-earner's net worth over time. And those top earners can borrow against said assets, growing their holdings more still.
Steven J. Willis, a law professor who specializes in tax at the University of Florida, believes Supreme Court precedent forecloses that argument.
"In a series of cases beginning in 1920, the Supreme Court made clear and reiterated that income has to be ‘clearly realized.' That's always been thought to take a transaction, a sale, an exchange, a transfer, something other than mere appreciation," Willis told the Free Beacon.
The 16th Amendment authorizes Congress to "collect taxes on incomes, from whatever source derived."
"The two key words there are ‘from' and ‘derived,'" Willis said. "That's where the realization concept comes from."
Eileen J. O'Connor, who led the Justice Department's tax division in the George W. Bush administration, said inflation can create a "double-whammy" for affected taxpayers.
"Not all increases in an asset's value are in fact appreciation, but instead are merely the effects of inflation," O'Connor told the Free Beacon. "Thus, affected taxpayers would be suffering the double-whammy of a reduction in the purchasing power of their dollars plus a tax on how that inflation boosted the price of their assets. Congress would be exacerbating the consequences of the government's own bad economic policy."
In the alternative, Wyden plan boosters believed his proposal could be justified as an excise tax. Wyden's concept is somewhat similar to the estate tax, which the Supreme Court has upheld as an excise tax. Andy Grewal, a law professor who teaches tax at the University of Iowa, is less certain about this line of argument.
"An excise tax applies to some kind of activity," Grewal told the Free Beacon. "For example, if you produce oil, we will impose an excise tax. Here, the theory is that the activity is owning a lot of property. To me, that's too clever a distinction because being rich isn't an activity."
That left a direct tax apportioned among the states as the last available avenue for Wyden's proposal. The apportionment requirement means that a tax must be the same amount per person in every state. Grewal says it's functionally impossible to impose Wyden's tax in this way.
"If Congress wants to tax property directly, it has to follow these complicated apportionment requirements, which as a practical matter it can't do," Grewal said. "So if this is really a property tax in disguise, then there's no real way to impose this billionaire's tax."
In general, the legal difficulty was aggravated by the fact that there are few precedents to consult, and scholars debate the veracity of those authorities that do exist. While supporters crafted theories to defend a billionaire's tax against constitutional attacks, it's questionable whether a right-leaning Supreme Court would have blessed them.
Wyden's proposal implicated other legal quandaries. O'Connor told the Free Beacon that taxpayers and the government could and likely would have challenged each other's valuations of particular assets. And she anticipated an expansion of the IRS would accompany enactment of a billionaire's tax.
"If an asset is not publicly traded, you are going to have disagreements about its value," O'Connor said. "Valuations raise contentious issues all the time. And if this were to become law, the IRS would need another group of people to decide how much assets are worth."
Nonetheless, a legal challenge would have faced difficulties. First, in most cases a tax cannot be challenged preemptively. A plaintiff must either pay the tax or face off with the IRS in tax court. That gives rise to a second, purely practical obstacle. As time passes, courts could become reluctant to close a revenue stream that the federal government comes to rely upon.
"I have less confidence than I wish I did that if Congress did pass and the president signed such a tax, that it would be undone and overturned," O'Connor told the Free Beacon.