Some of New York City’s leading progressive Democrats are mounting a campaign to pressure Governor Cuomo into backing a big new “wealth tax” on New York billionaires.

U.S. Rep. Alexandria Ocasio-Cortez is the star of a newly released four-minute online video supporting a proposal by her fellow Queens Democrat, state Sen Jessica Ramos, to charge New York State income tax on the unrealized capital gains of residents with net assets of at least $1 billion, as The New York Times reports today. The proceeds of Ramos’ “Billionaire Mark to Market Tax Act” would be deposited in a new “worker bailout fund” offering $3,300 to a large class of individuals who were displaced from their jobs by the coronavirus and are not eligible for other special unemployment assistance.

The Ramos bill memo does not provide a revenue impact estimate, but she reportedly has said “it could generate $5 billion for us every year.”

Ramos, Ocasio-Cortez, and other supporters of the bill cite a widely reported claim that New York State is home to more than 100 billionaires whose wealth has increased since the start of the pandemic. In fact, as explained below, that claim is misleading, to say the least. In addition, the Ramos bill assumes that New York’s wealthiest residents wouldn’t bother to evade such a tax through the simple expedient of moving to one of the 49 states that don’t impose anything like it.

All other objections aside, the bigger and more immediate problem with the Ramos measure is that it would violate the taxation clause of the New York State Constitution. The relevant second and third sentences of Article XVI, Section 3 read as follows:

Intangible personal property shall not be taxed ad valorem nor shall any excise tax be levied solely because of the ownership or possession thereof, except that the income therefrom may be taken into consideration in computing any excise tax measured by income generally. Undistributed profits shall not be taxed.

“Intangible property” refers to non-physical assets, including stocks and other financial investments, and “ad valorem” means “according to the value,” commonly used to describe a tax based on value.**  The provision’s exception for “income” from intangible property allows the state to tax corporate stock dividends and any gains actually realized from the sale of financial assets. But unrealized gains in any given year—which can, after all, quickly turn into losses—are not income. [***See update below.**] Ramos’ proposal to tax billionaires’ financial assets on a “mark to market” basis would amount to precisely the kind of ad valorem tax on intangible assets that Section 3 was designed to prevent.

It also would arguably violate Section 3’s final sentence prohibiting taxes on “undistributed profits,” which are embedded in unrealized corporate capital gains. As explained by Canisius Professor Peter Galie in an authoritative guide to the New York State Constitution, that sentence was added by delegates to the 1938 state constitutional convention “to prohibit legislation similar to that then found in the (federal) Internal Revenue Code imposing penalties on excessive accumulation of earnings,” and “its proponents hoped it would stimulate new enterprise and create jobs in the state.”

False premises

The Ramos bill is based on a widely reported claim, repeated in today’s Times story, that “the wealth of New York’s 119 billionaires increased by $77 billion from March to June.” However, the research behind that claim was taken apart in a recent National Review article by Brian Riedl of the Manhattan Institute.

Riedl notes that the estimate originated in a report by the Institute for Policy Studies based on data from the Forbes magazine “Real-Time Billionaires List,” which relies mostly on the growth in the value of stocks held by CEOs of top companies.

The IPS report measured billionaire asset values starting on March 18, after the pandemic had induced a steep crash in stock prices, and therefore “seems to have deliberately narrowed the pandemic timeframe to support a dishonest claim,” Riedl writes. He adds:

The authors manipulated the timing window to build the dishonest narrative that the pandemic has made America’s billionaires $584 billion wealthier. It is the equivalent of saying the Cleveland Browns went 6–0 last season if you don’t count the ten losses. The pandemic pushed up stock values if you don’t count the collapsing part. The rich got richer if you don’t count the downturns. That is not how wealth-building works.

Steve Goldstein of Marketwatch has estimated that — if properly measured, from the February market peak shortly before the pandemic hit — U.S. billionaires had collectively lost more than $400 billion dollars in wealth as of late May. (Amazon’s Jeff Bezos has been an exception. Since that article posted the S&P has grown 4 percent and yet remains down during the pandemic, while the tech-heavy NASDAQ has grown 7 percent to be slightly up overall during the pandemic — nothing that could drive the claimed 20 percent increase in billionaire net worth.) The point is not to pity these billionaires. Rather, it is that so many reporters blindly accepted a partisan analysis that is so misleading as to border on intellectual fraud.

In short: no, New York’s resident billionaires have not collectively gotten tens of billions of dollars richer during the pandemic. (Bezos owns a Manhattan penthouse among other luxurious second homes, but his home base reportedly remains a sprawling estate near Amazon headquarters in Seattle, Washington, where there is no state income tax.

Other soak-the-rich proposals

Another popular proposal among the Legislature’s tax-the-rich advocates would raise the existing millionaire tax of 8.82 percent to 10.9 percent (effectively a net 25 percent tax increase) on incomes above $5 million, for a period of three years, devoting the proceeds to educational programs.

A supporting memorandum from the bill’s lead Senate sponsors, Senators Shelley B. Mayer and Toby A. Stavisky, does not estimate how much revenue it would raise. The actual number is likely much smaller than any they would assume, however, because targeted taxpayers would be likely to react by making moves, literally and figuratively, to minimize their exposure to the higher rate.

Joshua Rauh, a Stanford University economist, recently published an exceptionally robust study of behavioral responses to millionaire tax increases in California. His key finding:

Among top-bracket California taxpayers, outward migration and behavioral responses by stayers together eroded 45.2% of the windfall tax revenues from the reform in 2013, with the extensive margin accounting for 9.5% of this total response.

A large erosion in revenues from a tax targeted at high earners would also erode the income tax base of New York City, where most of the wealthiest state residents live, and subtract from the economic spinoff effects of their business activities and personal purchases.

As pointed out in my New York Post op-ed yesterday, “there were clear signs of erosion at the high end of New York’s state tax base even before the pandemic,” including slower growth in millionaire earners in New York compared to the rest of the country, and a sharp increase the average incomes of New York migrants to Florida.

** This sentence reflects a correction from the original post, which erroneously defined ad valorem as meaning added value.

*** UPDATE (8/10/20)— Since this post was written, proponents of what is now being called the Billionaire Mark-to-Market Tax have argued that the proposed does not entail an unconstitutional ad valorem tax on intangibles but a constitutionally permitted income tax, which they have conveniently expanded to include taxation of “economic income.” The concept of “economic income” holds that since an intangible asset’s market value can add to the well-being of its owner—by, for example, serving as collateral for a loan—any increase in any asset’s value during a given period can be counted as if it were cash income, effectively money in the owner’s pocket, even when the asset represents long-term savings and has not been sold. As now generally applied to value assets in corporate accounting, the concept originated in “Value and Capital,” a book on macroeconomic theory by Thomas Hicks. The book was published in 1939 — the year after Article XVI, Section 3 of the New York Constitution was last updated. Then, as now, state and federal individual income taxes applied to actual cash flows—e.g., the monetary value of salaries, wages, net profits, and gains realized from the sale of stocks, bonds, or other intangible goods.

As noted above, the obvious problem with such a wealth tax on the state level, even aside from its dubious constitutionality, is the incentive it will provide New York’s relatively tiny handful of billionaires to simply move elsewhere.  The practical problems posed by any mark-to-market tax even on the federal level is explored in this Tax Foundation paper.  Another critique of the idea, and an alternative approach to increasing federal taxes on wealth, is offered here by the Tax Policy Center’s Howard Gleckman.