Paul L. Caron

Friday, March 15, 2024

Galle, Gamage & Shanske: Money Moves — Taxing The Wealthy At The State Level

Brian D. Galle (Georgetown; Google Scholar), David Gamage (Missouri-Columbia; Google Scholar) & Darien Shanske (UC-Davis; Google Scholar), Money Moves: Taxing the Wealthy at the State Level, 112 Calif. L. Rev. 999 (2025):

California law reviewIt's widely understood today that inequality is a major social problem that in turn contributes to other crises. By most accounts, tax systems are supposed to be our engines of equality. Yet in today’s United States, state and local tax systems mostly do the opposite: they take a greater percentage of the resources of the poor and middle class than of the rich.

Perhaps surprisingly, the traditional view among fiscal policy experts has been that this state of affairs is correct. In this standard account, only national governments should impose progressive or redistributive taxes. While acknowledging that there would be advantages to redistributive state taxation if it could be done efficiently, many experts worry that taxing the wealthy at the state level would drive taxpayers to move to a neighboring jurisdiction with lower rates, resulting in greater economic distortions and potentially little or no additional tax revenue. Similarly, politicians and advocates have opposed recent state efforts to tax the wealthy by arguing that such taxes will drive away the rich.

This Article argues that this traditional view is misguided.

Recent evidence finds that relatively few wealthy households actually move in response to changes in tax policy. On the other hand, the location of taxable income—the place where wealth is legally subject to claims of the state—is quite responsive to tax rates, due to a bevy of now-standard forms of tax gaming that we detail.

This distinction is highly significant because while physical relocations are hard to prevent, and indeed are good for a healthy federalism, the shifting of taxable income across borders has some ready legal solutions. As we detail here, a key feature of most state tax-avoidance schemes is the exploitation of the realization rule, the tax principle that imposes tax on appreciated property only when it is sold. States can greatly undercut this tax avoidance by instead imposing wealth or “mark-to-market” taxes on assets as they appreciate. Thus, critics of state wealth tax efforts have things exactly backwards: rather than mobility making wealth taxes self-defeating, wealth taxes are what can counter tax-avoidance mobility.

Accordingly, we outline here how a truly progressive state tax system could operate. Building on earlier work, we show that standard critiques of wealth and mark-to-market taxes, such as that they would struggle to tax hard-to-value assets, are actually easy to design around. We additionally explain other anti-avoidance rules that address some of the common techniques used by the wealthy to avoid state tax, such as trusts, partnerships, over-stuffed retirement accounts, and private foundations. With these new anti-avoidance tools available to states, we argue, the standard economic account shifts to favor truly progressive state tax systems.

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