4 wealth tax takeaways from this week's SCOTUS oral arguments

Insights into what could happen next. Also, Texas might be in trouble.

Photo by Ian Hutchinson on Unsplash

Happy Finance Friday! Earlier this week, the U.S. Supreme Court heard oral arguments for a highly anticipated income tax case called Moore v. United States. I wrote a story for Route Fifty about the justices’ reactions and what states have said about the case. In this week’s LSS, I’ll identify four takeaways from the case while also providing more background and context for why states are so interested in a federal tax code case.

First, some fast facts

• Moore v. United States centers on foreign earnings and a provision in the 2017 Tax Cuts and Jobs Act called the Mandatory Repatriation Tax (MRT). 

• The MRT is a one-time, retroactive tax on all foreign income dating back to 1986 as part of an overall tax cut on foreign earnings. 

• Charles and Kathleen Moore paid $15,000 in taxes on their investment—which increased in value by more than a half-million dollars—in an India-based company.

• The Moores argue that because they have not yet received any actual money back yet from that investment, they are being unconstitutionally taxed on unrealized income.

The justices don’t appear inclined to redefine income taxes

During oral arguments on Tuesday, the justices seemed keenly aware and at times downright wary of the potential impact of their ruling. Their questioning revolved around a few key concerns:

• Whether to define income realization in their ruling,

• The retroactive application of the MRT,

• The impact of their ruling/this case on anyone who holds shares in a foreign corporation.

Justice Brett M. Kavanaugh: “That seems to be an argument about timing. In other words, we have realization in this case. The entity realized income. The question then is attribution, and we've long held that Congress may attribute the income of the company to the shareholders or the partnership to the partners, and the only real wrinkle, I think, here is that it goes back and captures prior years' income.”

Justice Samuel A. Alito: “So we could say the 30-year requirement here is a substantive due process issue, so we don't have to grapple with it here.”

Justice Elena Kagan asking Moores’ attorney about LLCs, S-Corps and other types of corporations/partnerships: “Tell me why it is that you think we can decide for you without putting any of those kinds of very established taxation schemes at risk?”

Justice Sonia Sotomayor: “I don't fault the parties for shooting for the stars, but I guess the tenor of the questions is that nobody's happy with anybody's definition of anything.”

By some arguments, all states (even Texas) have a wealth tax.

A brief filed by 17 Democrat attorneys general argued that the repatriation tax was not a wealth tax and urged a narrow ruling upholding its constitutionality. Naturally, nearly all the states represented tax foreign intangible earnings and have a lot to lose if the MRT was found unconstitutional. 

Meanwhile, 17 Republican attorneys general argued that a broad ruling could encroach upon state and local taxation. In doing so, they take the position that property taxes are a kind of wealth tax.