SCOTUS punts on a wealth tax ruling
Three takeaways from the Moore v. United States ruling that had some state and local government pundits issuing doomsday warnings.
Happy Friday, readers! Yesterday, the U.S. Supreme Court ruled on an income tax case I’ve been following that could have had broad implications for state and local taxation. But instead, the court (wisely) decided not to upend the tax code and potentially cost state and local governments trillions of dollars.
Here’s a quick rundown of what was at stake and where we go from here.
Moore v. United States
From my story late last year on Route Fifty:
At the center of Moore v. United States are foreign earnings and a provision in the 2017 tax reform called the Mandatory Repatriation Tax. The reform was intended to minimize the incentive for U.S. corporations to hoard money overseas by reducing certain taxes on foreign earnings. In exchange for those reductions, investors and corporations had to pay a one-time, retroactive tax on all foreign income dating back to 1986. The provision helped pay for some of the corporate income tax cuts included in the 2017 Tax Cuts and Jobs Act.
Charles and Kathleen Moore, who paid $15,000 in taxes on their investment in an India-based company, decided to challenge the provision, contending that it amounted to a tax on unrealized income because they have not recouped their earnings from that investment. While acknowledging it has increased in value by more than a half-million dollars, they argue that because they have not yet received any actual money, they are being unconstitutionally taxed on unrealized income.
The case is viewed as an opportunity for the court to issue a preemptive strike against federal wealth taxes—such as President Joe Biden’s proposed Billionaires Minimum Income Tax—advocated by some Democrats. However, some warn the fallout from such a broader ruling could potentially have ramifications for various taxes that benefit state and local government coffers, including global intangible low-taxed income and property taxes.
Read more: What a major income tax case before the Supreme Court means for states
The ruling
In a 7-2 decision, the court ruled against the Moores but made it clear the ruling applied to their specific situation as a pass-through business. From the ruling:
Nothing in this opinion should be read to authorize any hypothetical congressional effort to tax both an entity and its shareholders or partners on the same undistributed income realized by the entity. Nor does this decision attempt to resolve the parties’ disagreement over whether realization is a constitutional requirement for an income tax.
In an analysis by the Tax Foundation, Alan Cole wrote, “The point is clear: while the court sides with the government in this case, the opinion of the court leaves many other questions unanswered.”
Not a surprise: As I wrote in an LSS newsletter that details the justices’ reactions during oral arguments, they seemed pretty darn wary of issuing a decision that could have broader implications beyond the tax situation immediately before the court.
At one point, Justice Elena Kagan asked the 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?”
What’s next?
The idea of a national wealth tax is still alive and well. But by opting not to define what qualifies as “realized income,” the narrow ruling makes it possible for the concept to be challenged down the road.
For states, the ruling means that the taxes they apply to foreign earnings, are safe. More states have been taxing these earnings since the 2017 tax reform made global intangible low-taxed income (GILTI) subject to taxation. While about half of states have decoupled from that part of the U.S. tax code and don’t tax foreign intangible income, 11 states now tax it at the highest level and other states tax it to some degree.
The dollars at stake are significant. For example Minnesota, the which established a GILTI tax rate last year, estimates the tax will bring $437 million more to the state’s coffers during the 2024-25 biennium.