The Supreme Court in a decision Thursday did not foreclose the kind of wealth tax some congressional Democrats have proposed, but justices left plenty of clues that they were not exactly leaving the door open to one either.
A couple who challenged part of a 2017 tax law and conservative organizations who supported them had argued that allowing the provision to stand would effectively sign off on a wealth tax, since part of the case hinged on whether income had to be “realized” to be taxed.
But in the majority opinion, Justice Brett M. Kavanaugh dodged the realization issue and wrote multiple times that the court would not wade into whether Congress could tax the accumulated wealth of individuals or unrealized income, such as appreciation in the value of unsold stocks.
“And nothing in this opinion should be read to authorize any hypothetical congressional effort to tax both an entity and its shareholders or partners on the same undistributed income realized by the entity,” Kavanaugh wrote.
Democrats have pushed for legislation taxing wealth for years, including bills this Congress from Sen. Elizabeth Warren, D-Mass, and Sen. Ron Wyden, D-Ore., but they have not gained Republican support.
“Right-wing billionaires hoped an obscure legal case would blow up the tax code to avoid paying what they owe, but this effort failed at the Supreme Court,” Warren posted on X after the decision.
“The fight goes on to tax the rich, pass a wealth tax on ultra-millionaires and billionaires, and make the system more fair,” Warren wrote.
Senate Finance Democrats met Thursday and said they want to increase taxes on the wealthy and multinational corporations. Wyden last year acknowledged that the proposals are unlikely to become law but said they could be used to spotlight income disparities and tax avoidance.
The Competitive Enterprise Institute, which helped support the challengers to the 2017 law in the case, issued statements from its senior officers that criticized the decision for not addressing broader questions of Congress’ tax power.
“What this means is that the constitutionality of other species of future taxes — such as a national wealth tax — remains entirely unaddressed by the Court’s opinion,” the group’s general counsel, Dan Greenberg, said.
Cato Institute legal fellow Thomas A. Berry in a statement called the decision “unfortunate” for not firmly closing the door on a federal wealth tax, “but it is important to recognize that it has not opened that door either.”
Question raised
The potential for a wealth tax came up in briefing in the case, as well as oral arguments. Conservative legal organizations along with West Virginia and 16 other Republican-led states argued that upholding the 2017 tax law provision could open the door to a wealth tax or “some other new and destructive idea.”
Justice Neil M. Gorsuch, who ultimately dissented from the decision along with Justice Clarence Thomas, questioned during oral arguments whether allowing the 2017 provision would allow Congress to make broader changes to taxation, including a wealth tax.
And Kavanaugh pointed out that Congress would have to pass a wealth tax for one to face a court challenge — an unlikely prospect. “On the proverbial ‘open door’ for Congress, Congress members want to get reelected,” Kavanaugh said at the time.
In Thursday’s decision, Kavanaugh pointed to several concessions from the government, which included that a wealth tax may be considered a property tax, rather than an income tax authorized by the 16th Amendment to the Constitution.
Kavanaugh also noted that the government conceded that taxes on the appreciation of assets may depend on a separate “realization” requirement that the court did not decide on Thursday.
Not having it
In a concurring opinion, two justices, Amy Coney Barrett and Samuel A. Alito Jr., agreed with the ultimate outcome but pointed out that the Supreme Court initially had agreed to decide whether Congress has the power under the Constitution to “tax unrealized sums.”
“The answer is straightforward: No,” the concurring opinion states.
And Thomas, in the dissent with Gorsuch, wrote that income can only be taxed when it is realized. Thomas criticized the majority opinion for what he called “a generous application of dicta” to “guard against unconstitutional taxes in the future.”
“The majority’s analysis begins with a list of nonexistent taxes that the Court does not today bless, including a wealth tax,” Thomas wrote, and the majority makes statements that will arm itself “to tell Congress ‘no’ in the future.”
Thomas wrote that Kavanaugh’s noting of government concessions and the limits of the decision do not mean much when the majority did not have the guts to rule in favor of the challengers when it would endanger trillions of dollars in federal revenue.
“But, if the Court is not willing to uphold limitations on the taxing power in expensive cases, cheap dicta will make no difference,” Thomas wrote.
