Contact: Jon Whiten ([email protected])
Taxing the proceeds generated by wealth – such as capital gains, dividends, and passive business income – through a new Wealth Proceeds Tax is a simple way for states to raise billions in new revenue and improve the fairness of their tax systems, according to a new report by the Institute on Taxation and Economic Policy (ITEP).
“States have an untapped opportunity to tax extremely wealthy families,” said Sarah Austin, ITEP Senior Analyst and co-author of the report. “The federal government already defines what counts as wealth-derived income, so states can easily adapt that framework to make their tax codes fairer and more robust.”
Key Findings
- Substantial revenue potential: A 4 percent Wealth Proceeds Tax modeled on federal rules could raise more than $45 billion a year; an enhanced version would raise $57 billion a year. (The report also includes detailed revenue estimates by state.)
- Taxes the wealthy, not the middle class: About three-quarters of the new revenue would come from households with incomes over $1 million; only 4.4 percent of taxpayers would owe any tax.
- Fairer treatment of wealth and work: Most of the income generated by wealth currently faces effective federal tax rates roughly 40 percent lower than wages and salaries. A state Wealth Proceeds Tax would help correct this imbalance.
- Simple to implement: States can piggyback on federal tax filings, minimizing administrative costs for both taxpayers and state revenue agencies.
- Minnesota already leads the way: The state enacted a 1 percent Wealth Proceeds Tax in 2023 using a straightforward law just 223 words long.
Creating a state Wealth Proceeds Tax is simple. States can piggyback on the federal Net Investment Income Tax (NIIT), which is a 3.8 percent levy on the investment returns of high-income households first implemented in 2013. Using the NIIT as a starting point allows states to design new taxes with minimal administrative burden and maximum impact.
Nearly three-quarters of all Wealth Proceeds Tax revenue would come from millionaires, and households with incomes under $250,000 for married couples (or $200,000 for single filers) would not pay the tax.
Taxing wealth-derived income would improve tax equity, reduce inequality, and provide a new, stable revenue source for states.
“For too long, our tax systems have favored wealth over work,” said Carl Davis, ITEP’s Research Director and co-author of the report. “State Wealth Proceeds Taxes would take a major step toward correcting that imbalance.”
About ITEP
The Institute on Taxation and Economic Policy (ITEP) is a nonpartisan think tank that conducts research on federal, state, and local tax policies, emphasizing equity, sustainability, and fiscal responsibility.
