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Vermont Proposes Taxing Unrealized Capital Gains

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  Published in Business and Finance on Friday, February 6th 2026 at 4:35 GMT by Los Angeles Daily News
      Locales: California, New York, Washington, UNITED STATES

A Patchwork of Proposals: From Vermont to California

The approaches to wealth taxation vary considerably from state to state. Vermont is pioneering a potentially groundbreaking path with a proposed constitutional amendment that, if ratified, would empower the legislature to tax unrealized capital gains annually. This is a crucial distinction; traditionally, taxes are levied on profits realized from the sale of an asset. Taxing unrealized gains would mean taxing the increase in value of an asset even if it hasn't been sold, presenting both an innovative revenue stream and significant valuation challenges.

California, arguably the epicenter of wealth in the US, is considering a more direct approach. State Senator Dave Cortese (D-San Jose) has put forward a proposal for an annual tax on households with a net worth exceeding $30 million. This proposal, while facing strong opposition, reflects the state's ongoing struggle with affordability and a widening gap between the ultra-wealthy and the rest of the population. The revenue generated could be directed towards pressing needs like infrastructure improvement and social programs.

Minnesota is also actively exploring a wealth tax, targeting individuals with over $50 million in assets. A key element of the Minnesota proposal is the designated use of the revenue: affordable housing. This focus addresses a critical need in the state and potentially builds broader public support for the tax. Other states, including New York, New Jersey, and Massachusetts, are engaged in similar discussions, each tailoring the proposals to their unique economic landscapes and fiscal challenges.

The Underlying Drivers: Inequality and Fiscal Strain

The resurgence of wealth tax proposals isn't a random occurrence. It's a direct response to two interconnected forces: escalating economic inequality and the ongoing pressure on state budgets. The COVID-19 pandemic dramatically amplified these issues. While many states faced significant revenue losses due to the economic downturn, the wealthiest Americans experienced a substantial increase in their fortunes, further exacerbating existing disparities. The pandemic laid bare the fragility of existing social safety nets and the widening chasm between those who have thrived and those who have struggled.

Emily Reynolds, an economist at the Institute for Equitable Prosperity, explains, "The level of wealth concentration in this country is simply unsustainable. States are looking for ways to generate revenue and address this inequality, and wealth taxes are increasingly being seen as a viable option." This sentiment is echoed by advocates for progressive taxation who argue that the current system disproportionately benefits the wealthy and fails to adequately fund essential public services.

Navigating the Complexities: Challenges and Legal Hurdles

Despite the growing momentum, wealth taxes face considerable hurdles. The practical challenges of implementation are significant. Accurately valuing assets like fine art, private equity holdings, and complex real estate portfolios is notoriously difficult and open to interpretation. This can lead to disputes, protracted legal battles, and increased administrative costs. Moreover, there's a very real risk of "capital flight," where wealthy individuals and businesses relocate to states with more favorable tax climates, potentially undermining the tax base.

Legal challenges are almost certain. Mark Fleming, a tax attorney at Miller & Zois, highlights the constitutional questions surrounding wealth taxes. "There are serious constitutional questions about taxing wealth rather than income," he notes. "The 14th Amendment's equal protection clause could be a major hurdle." Opponents argue that a wealth tax may be considered a direct tax on property, requiring apportionment based on population, which could be impractical and significantly reduce revenue.

The Core Debate: Revenue Generation vs. Economic Justice

Proponents of wealth taxes maintain that the potential benefits outweigh the challenges. They argue that a wealth tax could generate substantial revenue - potentially billions of dollars annually - that could be used to fund critical public services such as education, healthcare, and infrastructure. They also emphasize the moral imperative of addressing wealth inequality and ensuring that the wealthiest Americans contribute their fair share to society. They posit that the current tax system incentivizes wealth accumulation without adequately addressing the societal costs of inequality.

The debate over wealth taxes is expected to intensify in the coming months as states grapple with ongoing budget pressures and the increasing demand for economic justice. The outcome will likely shape the future of state revenue systems and have significant implications for wealth distribution in the United States.