Supreme Court sets up wealth tax battle for Congress

The Supreme Court passed the ball back to Congress on the question of a wealth tax in its decision on Moore v. U.S. last week, a case that implicated trillions of dollars in government revenue and vast swaths of federal law and precedent.

The decision carefully avoided the most wide-ranging questions on taxation raised by the case and kept the overall structure of the U.S. tax system intact in a 7-2 ruling against the petitioners.

But it also kept the door open to a potential — and politically controversial — tax on net worth, as Congress prepares for a battle over new tax legislation.

With key parts of former President Trump's 2017 tax cut law set to expire next year, the Moore case adds another wild card to upcoming fight.

“They’re still leaving it to Congress whether to give a wealth tax a swing. They didn’t take it off the table, but they did show they’re more than ready to catch the fly ball if Congress decides to pop it up,” Leila Carney, a tax attorney with law firm Caplin Drysdale, told The Hill.

The justices made the limitations of their ruling clear, saying their analysis does not address the “issues that would be raised by … taxes on holdings, wealth, or net worth.”

While the court left the possibility of an express wealth tax open, it also signaled a healthy amount of skepticism toward the idea, effectively putting pressure on lawmakers in both parties to come up with feasible legislation, if they decide to take up the issues.

“Lawmakers who are happy with the status quo of the tax system don’t need to change anything. Lawmakers interested in a wealth tax now know that there is some skepticism at the court from at least four members, and possibly members of the majority, as well, on taxes that would target either net worth or the appreciation in value of a taxpayer’s assets,” tax attorney Swift Edgar with law firm Cleary Gottlieb told The Hill.

The big constitutional questions raised by the Moores' petition were left unaddressed by the court, effectively limiting the decision’s applicability to other parts of the law. The specific tax brought up by the Moores, known as the mandatory repatriation tax, was not fundamentally changed in the decision.

The constitutional questions pertain to the notion of “realization,” which refers to the transfer of value through economic processes. The question of when exactly income is realized — and therefore subject to taxation — was left alone by the court.

Had the court entertained the Moores on the level of realization, other areas of the law that count income as “realized” before investors actually have cash in their hands would have been impacted.

These include large areas of financial and economic law, such as subpart F and the mark-to-market regime, both of which have international implications.

The Court’s decision in Moore comes ahead of a pivotal year for both domestic and international tax policy.

Tax cuts passed through Trump's 2017 Tax Cuts and Jobs Act are set to expire at the end of next year and are prompting a flurry of legislative activity from lawmakers in both parties.

Republicans on the House Ways and Means Committee, which has domain over tax policy, have broken out into working groups on areas of taxation in the economy that extend beyond the Trump-era individual and pass-through entity cuts that are set to expire.

Some Ways and Means Republicans, including panel Vice Chair Rep. Vern Buchanan (Fla.), have signaled an interest in dropping the corporate tax rate below the current 21-percent level, where it was slashed in 2017 from 35 percent. Buchanan also leads the Ways and Means GOP working group on manufacturing-related tax provisions.

Trump has also proposed getting rid of taxes on tips, a move designed to appeal to service workers. He first pitched the idea on the campaign trail in the swing state of Nevada, where the gaming and hospitality sectors are a major part of the economy.

Meanwhile, Democrats are also broadening their tax agenda beyond the parameters of the Trump tax cut expirations and even reconsidering past actions of their own party.

Earlier this month, Sen. Elizabeth Warren (D-Mass.) criticized former President Obama for extending tax cuts enacted by his predecessor with the consequence of expanding the deficit.

“Once Obama made that tax cut deal with Republicans, the federal deficit ballooned,” Warren said in prepared remarks earlier this month. 

“The next chapter in the story was an exercise in five-star hypocrisy. Right after the deal was cut, Republicans claimed to care deeply about the deficit. They then fabricated a debt ceiling crisis, which they used to extract crippling budget cuts. Those cuts cost the U.S. economy more than 7 million jobs, and they helped set the stage for Donald Trump’s election in 2016,” she said.

On the administrative side, the IRS has been in touch with Congress about their legislative priorities while managing realities on the ground.

A stalled tax deal in the Senate that would include business credits and an expansion of the child tax credit would be paid for by a cancellation of the employee retention credit (ERC), which has been giving the IRS problems due to a flood of bogus claims.

Despite a moratorium on the ERC enacted after the pandemic crunch on the economy, the IRS has still been getting about 17,000 claims on it per week, IRS Commissioner Danny Werfel told reporters last week.

“IRS employees worked hard to deliver these claims and as members of Congress have noted the program worked as intended during the crisis period. But then the promoters took over. As time when on, aggressive marketing overwhelmed this well intentioned program,” Werfel said.

On the international level, which tends to move slower than domestic policy, tax treaties regarding a global 15-percent minimum tax and another on where exactly companies can get taxed are in various stages of ratification and implementation.

The Treasury Department's top negotiator at the Organization for Economic Cooperation and Development recently dug his heels in on a clause regarding marketing and distribution activities for one of the international tax packages, according to reporting by Politico.