Many states—and maybe soon the federal government—are scrambling to repair tax revenues as the Covid-19 crisis drags on. That raises the possibility of increased taxes, and some think the familiar call to tax the wealthy most will gain new momentum.
States have already moved to bolster revenues, beginning debates on creating or increasing taxes. This will hit “more wealthy taxpayers who proportionately spend more on goods and services,” said Timothy Speiss, CPA and co-partner in charge of the personal wealth advisors practice at EisnerAmper in New York.
“The situation is highly speculative and magnified because of an election year,” added Steve Wittenberg, director of legacy planning at SEI Private Wealth Management in Oaks, Pa. “There are only two options: Raise taxes or control the budget by cutting other expenses. Raising taxes on the wealthy may provide the biggest bang.”
The question is whether more taxes are the cure for plunging revenues. “One doesn’t necessarily lead to the other, taking into consideration political outcomes, competition among states to attract the wealthy and other factors,” said Robbin Caruso, CPA, CGMA and partner at Prager Metis in Cranbury, N.J.
But given the deep losses in government revenues and extensive increase in unemployment benefits and tax relief, raising taxes on wealthier taxpayers becomes a real possibility, she added.
Still, “history hasn’t supported the notion that the federal government will raise taxes when they need more money,” said Jared Feldman, CPA, partner and leader of the private client group at the accounting firm Anchin. “There are ways of raising taxes without raising rates—disallowing deductions either outright or phasing them out for higher-income taxpayers.”
For example, even though there were no changes in the tax rates in the Coronavirus Aid, Relief and Economic Security (CARES) Act, some provisions decreased the tax burden for some wealthy taxpayers who own businesses.
One idea is to simply increase tax rates on the highest tax brackets, Wittenberg said. “There’s often talk of increasing taxes on investments since the majority of those impacted would be the wealthy,” he added. “This would be synonymous with the 3.8% Medicare tax. The estate tax/death taxes are always at play as well.”
Presumptive presidential candidate Joseph Biden has said he wants to raise the highest tax bracket to 39.6%, increase the capital gains tax on gains of more than $1 million and cap itemized deductions, said Cindy Ostrager, CPA/CFP, managing director at the wealth-management firm Clarfeld Citizens Private Wealth in Tarrytown, N.Y.
Biden’s plan also includes repealing the tax cuts from the Tax Cuts and Jobs Act for people earning above $400,000 and repealing basis step-up for inherited assets, among other proposals.