Illinois’ latest tax scheme, a 4.95% “wealth tax” on unrealized gains for billionaires, risks violating the state constitution, likely resulting in a long and costly legal battle.
As part of a plan to generate $1.5 billion for the Regional Transit Authority and close its $200 million budget gap, lawmakers propose a first-of-its-kind “billionaire tax” which would tax unrealized gains on assets at 4.95%, equivalent to the state’s flat income tax rate.
The bill would likely face a lengthy legal challenge as the Illinois constitution prohibits additional income taxes or personal property taxes.
What this tax does
Currently, capital gains which include assets such as stocks, real estate or private business shares are taxed only when they are sold and income is realized. Under this new proposal, Illinois residents with net assets exceeding $1 billion would calculate the market value of these assets each year and pay a 4.95% tax on the appreciation.
Losses on capital gains would not be recognized in that taxable year but would be able to be carried forward indefinitely.
It could violate the Illinois Constitution
The Illinois constitution explicitly prohibits taxation of personal property, including non-tangible assets such as stocks, bonds and patents. 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. This is in theory, not a reflection of what the word “income” means, whether in common usage or by tax professionals.
Challenges to this expanded definition of “income” emerged at the federal level. Critics of a capital tax proposal from the Biden administration argued that taxing unrealized gains stretches the definition of income beyond its legal limits, potentially making the proposal unconstitutional under the 16th amendment.
The tax also runs the risk of double taxation which is also prohibited under the Illinois constitution. Double taxation happens when taxes are paid twice on the same dollar of income. The tax would apply to the income that is used to buy assets, when those assets accumulate value, to finally when those assets are sold, creating a sequential taxation on the same income stream.
Conclusion
There is a reason that this tax does not exist anywhere else in the world. Along with the economic harm, added costs to administration and increased tax complexity, this change can produce a lengthy and costly legal battle which can further undercut any short-term value that the tax creates.
Rather than layering on yet another tax on one of the most heavily taxed states in the nation, Illinois leaders should push the RTA to reform itself. This means prioritizing cost savings, modernizing fare policy and improving performance standards instead of punishing taxpayers for years of fiscal mismanagement.
