States are responding to wealth concentration by closing loopholes and ending special tax benefits.

States are responding to wealth concentration by closing loopholes and ending special tax benefits .

States from Hawaii to Connecticut responded to extreme wealth concentration this year by expanding taxes on the assets of the very wealthy — such as stocks, bonds, real estate, boats, and jewelry — while closing loopholes and ending other special tax benefits that shield many of these assets from state and local taxes.

These taxes are important because America’s wealth is concentrated in the hands of a relative few. The top 1 percent of households owns roughly 40 percent of the wealth, while the bottom 90 percent owns just 21 percent. This top-heavy structure reduces opportunity for millions of families — particularly Black and Latinx families and other families of color, who have faced barriers to building wealth due to the legacy of historical racism and the ongoing damage from racial bias and discrimination. State tax systems contributed to wealth concentration, as wealthy individuals and corporations used their power to shape state tax policies to their own benefit. But better state tax policies can be a powerful tool for sharing prosperity more broadly.

State and local governments depend mainly on income, sales, and property taxes. Low- and middle-income taxpayers pay a larger share of their income in sales and property taxes than the wealthiest taxpayers do. The opposite is generally true for state income taxes but, in most states, total state taxes ask the most of taxpayers who can least afford itStates can address the problem by strengthening their taxes on wealth, as many did this year

Estate and inheritance taxes. State taxes on inherited wealth apply only to the wealthiest individuals and are the main state taxes on wealth. Policymakers have weakened federal and state estate taxes in recent years and, now, the federal tax reaches fewer than 1 in 1,000 estates and state estate taxes are increasingly rare. But the trend towards cutting and eliminating state estate taxes appears to be slowing or possibly reversing.

  • In 2018, four of the five states that automatically set their exemptions from estate taxes equal to federal exemption levels rejected the major exemption increase included in the 2017 federal tax law.
  • This year, Hawaii raised its estate tax by lowering its exemption level, while similar proposals in Maine and Minnesota received significant support but weren’t ultimately adopted.
  • In addition, none of the perennial efforts to eliminate estate or inheritance taxes in the 17 states and Washington, D.C. that levy them succeeded this year or last.

Capital gains taxes.States can also build more broadly shared prosperity by strengthening their taxes on capital gains — the profits an investor realizes when selling an asset that has grown in value, such as stock, mutual funds, real estate, or artwork. Unlike the federal government, most states tax income from investments and income from work at the same rate. Only nine states tax all long-term capital gains at rates lowerthan ordinary income.

New Mexico and Vermont scaled back their special tax preferences for capital gains this year, while policymakers in Connecticut, Washington, and Wisconsin considered either doing the same or creating new capital gains surtaxes (higher tax rates on capital gains income than on income from wages, salaries, and other sources).

Mansion taxes. The property tax is mainly a local tax, but 39 states and Washington, D.C. levy either a state-level property tax or real estate transfer tax — a tax or fee that’s levied when parties transfer ownership of real property, such as when someone buys or sells a home. Only a handful levy a higher tax on high-value housing, often called a mansion tax. But, this year, Connecticut, New York, and Washington added higher rates at the top of their real estate transfer taxes. Connecticut will levy a 2.25 percent tax on homes valued at $2 million and above; New York added graduated taxes for houses with values starting at $2 million; and Washington will levy a 2.5 percent tax on houses sold for more than $5 million.

Many states will continue trying to close wealth-tax-related holes next year. Those efforts would help offset wealth concentration while raising revenues for investments that include education and health care and for income supplements such as state Earned Income Tax Credits that help families struggling to make ends meet.

Elizabeth McNichol

Elizabeth McNichol is a senior fellow at the Center on Budget and Policy Priorities specializing in state fiscal issues including the economy’s impact on state budgets and long-term structural reform of state budget and tax systems. She also works on related state policy issues including estate taxes, pension funding and trends in income inequality

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