Federal Wealth Tax Proposals and the Constitutional Impact of Moore v. United States
The constitutionality of federal wealth tax proposals—such as Senator Elizabeth Warren's Ultra-Millionaire Tax Act (a 2% to 3% annual tax on net worth over $50 million) and Senator Ron Wyden's Billionaires Income Tax Act (a mark-to-market tax on unrealized gains for households with over $100 million)—remains one of the most contentiously debated legal questions in the United States. The Supreme Court's June 20, 2024 decision in Moore v. United States provided critical, albeit narrow, guidance on the outer limits of federal taxing power.
The Narrow Holding in Moore v. United States
The Moore case challenged the constitutionality of the Mandatory Repatriation Tax (MRT) enacted under the 2017 Tax Cuts and Jobs Act, which imposed a one-time tax on the accumulated, undistributed foreign earnings of foreign corporations owned by American shareholders. The petitioners argued that the tax was unconstitutional under the Sixteenth Amendment because it taxed "unrealized" gains, asserting that "realization" is a constitutional prerequisite for any unapportioned income tax.
In a 7-2 decision, the Supreme Court upheld the MRT, but explicitly declined to resolve the broader question of whether the Sixteenth Amendment requires income to be realized:
"The Mandatory Repatriation Tax does not tax an increase in the value of shares of stock, which is more clearly a case of unrealized gain... [W]hether realization is required for an income tax. We do not decide that question today."
Instead, the majority opinion, written by Justice Kavanaugh, based its holding on a long line of precedent allowing Congress to attribute the realized income of an entity (such as a corporation or partnership) to its shareholders or partners:
"Our analysis today does not address the distinct issues that would be raised by (i) an attempt by Congress to tax both the entity and the shareholders of partners on the entity's undistributed income; (ii) taxes on holdings, wealth, or net worth; or (iii) taxes on appreciation."
Implications for Federal Wealth Taxes
While the majority opinion side-stepped the realization requirement, it included a significant warning regarding the viability of a federal wealth tax. Under Article I of the U.S. Constitution, "direct taxes" must be apportioned among the states according to their population—a requirement that is politically and practically impossible for a wealth tax (as it would require higher tax rates in poorer states with fewer wealthy residents).
During oral arguments, the federal government made a crucial concession that a tax on wealth or net worth would likely be classified as a direct property tax rather than an income tax, meaning it would be subject to the apportionment requirement:
"In its brief and at oral argument, for example, the Government indicated that a hypothetical unapportioned tax on an individual’s holdings or property (for example, on one’s wealth or net worth) might be considered a tax on property, not income."
If the Supreme Court officializes this classification in a future case, it would render any unapportioned federal wealth tax (like Warren's proposal) unconstitutional.
The Mark-to-Market Alternative
To bypass this hurdle, some federal proposals, like Wyden's Billionaires Income Tax Act, are structured as "mark-to-market" income taxes rather than wealth taxes. These bills would require taxpayers with net worths exceeding $100 million to recognize annual gains or losses on their tradable assets as if they had been sold, taxing the appreciation as income.
However, because Moore left the realization requirement open, a federal mark-to-market tax on unrealized appreciation would immediately face intense constitutional challenges. Opponents would argue that taxing annual paper gains on unsold stock is an unapportioned tax on property appreciation rather than income.