For years, liberal Democrats have advocated that the United States tax wealth, not just income. That way, wealthy Americans who accumulate wealth in real estate, stocks, bonds and other assets would pay more in taxes.
On Thursday, that dream survived a Supreme Court scare, but just barely.
Thanks to a narrow judge’s ruling, plans to use the tax code to close the gap between the wealthiest Americans and the rest of the population appear likely to remain in leading Democrats’ campaign proposals and official budgets for years to come.
The idea of a wealth tax was not directly before the court on Thursday. Judges considered the constitutionality of a new tax imposed under former President Donald J. Trump that applies to certain income earned by companies abroad. But by taking the case, the judge could have preemptively declared the federal wealth tax unconstitutional.
That did not happen and liberal groups celebrated the victory.
“The Supreme Court could also have taken an activist turn of the worst kind by preemptively declaring today that federal wealth taxes are unconstitutional,” said Amy Hanauer, the executive director of the Institute on Taxation and Economic Policy, which advocates higher taxes on corporations and the riches, in a statement. “It is to the court’s credit that it did not do that.”
But the case also offered a glimpse into the legal battles to come over various iterations of a wealth tax, should Congress ever pass one. It showed a solid four justices who strongly opposed such a tax — and two more who seemed skeptical.
“This is a narrow decision,” Joe Bishop-Henchman, vice-president of the National Taxpayers Union, which opposes wealth tax proposals, said in a statement Thursday. But, he added, “the court makes clear that it does not open the door to a wealth tax.”
The pronounciation in the case on Thursday was nominally about the constitutionality of a tax that was part of the tax overhaul that Mr. Trump signed into law in 2017. The justices upheld the measure by a vote of seven to two.
The larger debate surrounding the decision, which played out over 83 pages of writings from various justices, was whether Congress has the power to tax wealth.
President Biden and other leading Democrats have pledged to pay for sweeping new spending programs, such as expanded health insurance or universal paid leave, in part by taxing the net worth of some of the wealthiest people in America. They would go beyond traditional government efforts to tax income from work or investments, and instead tax multimillionaires on the paper gains their portfolios produce.
Many conservatives have argued that these plans violate the Constitution’s limits on what kinds of taxes the federal government can levy. Some groups had urged the court to accept this argument, preemptively declaring wealth taxes off-limits to lawmakers.
The issue largely boils down to what counts as “income.” Is it money that shows up in someone’s bank account, say from a paycheck or a stock sale? Or so-called unrealized gains from assets that become more valuable over time, even if they’re not sold?
Four conservative justices wrote Thursday, in a concurring or dissenting opinion, that unrealized gains do not count as income — suggesting that wealth taxes by extension are a no-go. That’s nearly a majority, and it was enough to alarm proponents of a wealth tax.
“It is now clear that four Supreme Court justices are in the thrall of billionaire influence,” Morris Pearl, the leader of Patriotic Millionaires, a group that supports higher taxes on the wealthy, wrote in a press release.
But the ruling also showed a path for a wealth tax, albeit a narrow one. Justice Ketanji Brown Jackson, one of the court’s liberals, wrote what is essentially a blueprint for government lawyers to argue a potential wealth tax before the court and a legal theory that justices could follow to uphold it.
She expressed doubts about whether the Constitution requires income to be realized to qualify for federal taxes and said the court should play a “limited” role in tax debates.
She urged the justices to let the public settle the dispute, perhaps knowing that wealth taxes tend to score favorably.
Two other liberal justices will likely side with Judge Jackson if such a case ever reaches the court. That leaves a few conservatives as likely votes: Chief Justice John G. Roberts Jr. and Justice Brett M. Kavanaugh, who wrote the court’s majority opinion on Thursday. That opinion was peppered with references to what might or might not count as “realized” income for tax purposes, but explicitly declined to take a position on future wealth tax issues.
“These are potential issues for another day,” Judge Kavanaugh wrote, “and we are not addressing or resolving these issues here.”
