Financial advisors oppose state-level wealth tax legislation

State legislators introducing wealth tax legislation Thursday won’t be able to count on support from financial advisors.

Lawmakers in seven states — California, Connecticut, Hawaii, Illinois, Maryland, New York and Washington — are launching a coordinated effort to push for levies on assets such stocks, bonds and art work.

The details of the bills will vary from state to state, but the idea is to go beyond income as the means to generate taxes from those with high net worth, who some lawmakers say aren’t paying their fair share.

The proposals are being floated at a time when it will be almost impossible for Congress to pass a wealth tax, as Republicans control the House and Democrats maintain a Senate majority.

But advisors in the affected states warn that if the bills are enacted, the new tax policy could push wealthy residents to lower-tax states.

“It’s an incredibly foolish idea,” said Sean Williams, owner of Sojourn Wealth Advisory in Timonium, Maryland. “Income is realized but net worth is not. This will suppress growth for both citizens and the states [considering] these tax laws.”

Williams said he has had clients move to other states in part as a result of what he calls Maryland’s already high taxes. One destination for a future exodus could be neighboring Virginia.

“It’s pretty good for Virginia,” Marcio Silveira, an advisor at Silvergreen Sustainable Investments in Arlington, Virginia, said of the Maryland bill. “The south is likely to benefit from it. Virginia has the blue-state vibe with red-state rules.”

Jeff Fishman, president of JSF Financial in Los Angeles, has had six clients move to Nashville, Tennessee, over the last two years due in part to California taxes. Other clients have headed to Austin, Texas, and Florida.

“I think it’s a horrible idea,” Fishman said of a wealth tax. “If it’s too onerous, people will pick up and leave. At the end of the day, this is going to be self-defeating.”

All seven of the states where the legislation is being introduced are blue politically, with Democratic majorities in the legislature and Democratic governors, said Jared Walczak, vice president of state projects at the Tax Foundation, a think tank in Washington, D.C.

“Taxing-the-rich is an unimaginative and broadly politically popular easy button for leftward leaning state legislatures to push,” Amy Hubble, principal at Radix Financial in Oklahoma City, wrote in an email. “However, in practice higher net worth individuals will always have more flexibility in how and from where they generate income, distribute wealth and optimize recognition timing.  And if pushed aggressively, other states and jurisdictions — Delaware, Wyoming, Texas, Florida, Nevada — will happily compete for those domiciles.”

If New York passes a wealth tax, it will see a migration of business owners, said Gary Schwartz, president of Madison Planning Group in White Plains.

“They’re going to start pushing more and more people out,” Schwartz said. “People are going to look at: 'How can I [run] my business and not be a New York resident?'”

Lawmakers sponsoring the wealth tax bills told the Washington Post that they’re acting in concert in part to reduce the chance that states will be pitted against each other on tax policy.

It’s unusual to see a coordinated effort across multiple states, Walczak said. Achieving success on a wealth tax in each of them will be a heavy lift.

“This will be difficult to pass in any state, let alone all seven,” Walczak said. “They should be taken more seriously this year. But supporters would still need a lot of votes. They’re a destructive tax that has never been passed in the United States for a good reason.”

Even though the political prospects for the wealth taxes are murky, they could be a catalyst for conversations between advisors and clients.

“What this does is give us an opportunity to help our clients do additional planning … to reduce their exposure to taxes,” said Steve Wittenberg, director of legacy planning at SEI Private Wealth Management.

That planning could be facilitated if Congress restores the state and local tax deduction that was sharply reduced in the 2017 tax law, said Gary Schwartz, president of Madison Planning Group.

“If the SALT tax returns, I don’t think [state wealth taxes] will matter,” he said. “It won’t hurt.”

But Tim Steffen, director of advanced planning at Robert W. Baird & Co., said that because wealth taxes target the value of an asset, not the income, there isn’t a lot advisors can really do. 

“For an income tax, you optimize a portfolio based on how the income is taxed,” Steffen wrote in an email. "With a wealth tax, about all you can do is suggest a client move assets out of their name to reduce their wealth. Gifting may be the best way to deal with this, whether it’s gifting to other family members to spread the wealth around, or to charity to move it out of their name entirely.”

Some of the states will consider bills that tax unrealized capital gains, according to the Washington Post. Connecticut will debate raising income taxes on high earners. If successful, the proposals could be a model for Congress, where a wealth tax has failed.

“Some states like to test out ideas that could be enacted on the federal level,” Wittenberg said.

Although he’s opposed to state-level wealth taxes, Silveira supports a national levy.

“The tax system is the most efficient way to address inequities,” he said. “The United States is well-positioned to be a leader on something like this.”