Illinois billionaire tax proposal draws warnings from think tanks

Illinois lawmakers are fast-tracking a proposal to tax the unrealized gains of billionaires, a move that has drawn sharp warnings from taxpayer advocacy groups who say the measure could have significant legal and economic consequences.

The plan, known as the Extremely High Wealth Mark-to-Market Tax Act, would impose a 4.95% tax on the paper gains of assets held by Illinois residents with net worths exceeding $1 billion.

The tax would apply to a broad range of assets, including stocks, bonds, private business interests, real estate, art, and even assets held in trusts or private foundations.

Lawmakers are seeking to move the bill through the state legislature in less than two days, aiming to generate $1.5 billion for the Regional Transit Authority and help close a $200 million budget gap.

The bill was introduced on Tuesday, October 28, for a veto session set to end on Thursday, October 30.

Under current law, capital gains are taxed only when assets are sold and income is realized. The new proposal would require annual valuations of all qualifying assets, with taxes owed on any appreciation – even if the owner has not sold or otherwise realized any cash from those gains. Losses would not be recognized in the same year, though they could be carried forward indefinitely.

Jared Walczak of the Tax Foundation described the proposal as “an astonishing proposal to try to rush through in less than two days, and one with significant consequences for investment in new and innovative businesses.”

He noted that “no tax system anywhere in the world has a mark-to-market capital gains tax that captures unrealized gains,” and warned that the complexity of annual valuations, especially for illiquid or privately held assets, could force some business owners to sell stakes just to pay their tax bills.

The Illinois Policy Institute echoed concerns about the proposal’s constitutionality, pointing out that the state’s constitution prohibits both personal property taxes and double taxation.

“Supporters are calling this proposal an ‘income tax’ by arguing that on-paper increases in capital gains count as ‘economic income,’ even though no money changed hands,” the institute wrote.

The group warned that the measure could lead to a protracted legal battle, with critics arguing that taxing unrealized gains stretches the definition of income beyond its legal limits.

Advocates of the tax say it is needed to address budget shortfalls and ensure that the wealthiest residents contribute more to public services. However, opponents argue that the measure could drive high-net-worth individuals out of state, reducing Illinois’ overall tax base.

Walczak cautioned that “if unrealized capital gains are to be taxed year after year, that could easily drive some of Illinois’ wealthiest taxpayers out of state – depriving the state of their existing income tax payments.”

The proposal also raises questions about administrative feasibility, similar to those raised by a federal-level proposal advanced last year by former Vice President Kamala Harris. Determining the fair market value of non-traded assets such as private businesses or artwork is notoriously difficult and could lead to disputes and high error rates.

Lawmakers have suggested allowing taxpayers to pay their annual assessments over a decade, but with a 7.5% penalty, which critics say does little to address the underlying liquidity challenges.

As Illinois lawmakers race to finalize the bill before the end of the current veto session, taxpayer advocates are urging a more deliberate approach.

The Illinois Policy Institute concluded that, rather than introducing a new tax, “Illinois leaders should push the RTA to reform itself … instead of punishing taxpayers for years of fiscal mismanagement.”