One state found a way to make billionaires pay. Could yours be next?

01 The state wealth tax experiment

Washington State has become the testing ground for a fundamental question in American tax policy: can a state tax wealth itself, not just income? Wikipedia defines a wealth tax as "a tax on an entity's holdings of assets, or an entity's net worth" — distinct from income tax, which taxes money as it is earned. Washington's capital gains tax on extraordinary investment profits, enacted in 2021, was the opening move. The state supreme court upheld it as constitutional in 2023, opening a legal pathway that other states are now studying closely.

The capital gains tax applies a 7 percent levy on annual investment profits above roughly $250,000, targeting the ultra-wealthy who derive most of their income from assets rather than wages. In its first year, it generated over $600 million in revenue. The success — both fiscal and legal — has prompted legislators in California, New York, Massachusetts, and other states to draft broader proposals, including taxes on unrealized gains for the very wealthiest households.

02 How billionaire wealth is structured

Most billionaire wealth is not in bank accounts or paychecks. It is in stock, real estate, private business interests, and other appreciating assets. Under current US tax law, these assets are not taxed until they are sold — a concept known as unrealized gains. A billionaire whose stock portfolio grows by $10 billion in a year pays no federal income tax on that growth. They can borrow against the increased value, live lavishly on the loans, and never trigger a taxable event.

This is the "buy, borrow, die" strategy at the heart of billionaire tax avoidance. Loans are not taxable income. The assets continue to appreciate. When the holder dies, heirs receive the assets with a "stepped-up basis" — the market value at the time of death — wiping out all accrued capital gains for tax purposes. The system, as currently structured, allows enormous fortunes to grow and transfer across generations with minimal tax interaction.

03 The legal challenges to wealth taxes

State-level wealth taxes face significant legal hurdles. The Washington State Supreme Court ruled that the capital gains tax was an excise tax, not an income tax, and therefore did not violate the state constitution's flat income tax requirement. This distinction is legally contested and may not survive federal court challenges. Critics argue it is functionally an income tax dressed in different clothes, and at least one federal case is pending.

For broader wealth taxes — including taxes on unrealized gains — the constitutional questions multiply. The Sixteenth Amendment authorizes federal income tax, but wealth taxes and unrealized-gains taxes may or may not qualify as "income" under existing interpretations. The Supreme Court's 2024 ruling on the Moore case, which addressed whether unrealized gains count as income, has been read narrowly, leaving substantial ambiguity. State experiments are, in effect, testing the boundaries of constitutional tax authority.

04 What the revenue could fund

The fiscal potential of state wealth taxes is significant. Washington's capital gains tax revenue is earmarked for education funding and child care programs. Proponents in California estimate that a 1 percent wealth tax on assets over $50 million could generate $20 billion or more annually for the state budget. New York's proposals project similar proportional yields.

The revenue could fund public education, infrastructure, healthcare access, or deficit reduction, depending on legislative priorities. The appeal to proponents is not just the dollar amount but the source: taxing accumulated wealth rather than wages shifts the tax burden upward, addressing the decades-long trend of declining effective tax rates at the top of the income distribution while middle-class tax burdens have remained stable or increased.

05 The anti-tax counter-argument

Critics of wealth taxes raise both practical and philosophical objections. The practical argument is administrative: valuing complex private assets, preventing capital flight, and enforcing compliance are difficult and expensive. Billionaires and their wealth are mobile. If a state imposes a wealth tax, the argument goes, the wealthy will simply relocate to states without one, taking their tax base with them.

The philosophical argument is about fairness and incentive. Opponents argue that wealth taxes penalize success, discourage investment, and amount to double taxation — taxing money that was already taxed when it was earned. They point to European wealth taxes, several of which were repealed after generating less revenue than expected and driving capital out of the countries that imposed them. France, Germany, and Sweden all abandoned or scaled back wealth taxes in the 2000s.

06 Other states considering similar measures

Washington's success has not gone unnoticed. California's wealth tax proposal, reintroduced repeatedly in the legislature, would impose a 1 percent tax on net worth above $50 million and 1.5 percent above $1 billion. New York has considered a similar "mark-to-market" system for ultra-high-net-worth residents. Massachusetts, Illinois, and Connecticut have explored various versions of wealth or enhanced capital gains taxation.

The political landscape is mixed. Blue states with progressive legislatures are the most likely to follow Washington's lead, but even there, governors and moderate legislators have been cautious, wary of capital flight and business backlash. The real test will be whether the first few adopters generate enough revenue and survive enough legal challenges to build momentum for a broader movement.

07 The federal vs state approach to taxing wealth

Wikipedia notes that economic inequality is "an umbrella term for three concepts: income inequality, how the total sum of annual income is distributed" across a population. The wealth gap, distinct from income inequality, has grown substantially in recent decades. Federal approaches to taxing wealth have stalled in Congress, but state-level experiments are filling the void — creating a patchwork of tax policies that may, over time, shift how American governments fund themselves.

The federal government has broader tax authority than states, and a federal wealth tax would eliminate the capital-flight problem by making relocation within the country irrelevant. But federal legislation requires congressional action, which has been blocked by political gridlock. State-level taxes, while more vulnerable to migration and legal challenge, can be enacted with smaller political coalitions and serve as proof of concept. If multiple states demonstrate that wealth taxes can work, the pressure for federal action will grow. If they fail — through evasion, litigation, or capital flight — the argument for state-by-state solutions weakens and the national conversation shifts.