7 States Are Proposing New Wealth Taxes -- Is Yours One of Them?

These states are believed to collectively hold 60% of the nation's wealth.

In seven states across the country, Democratic lawmakers are proposing broad changes to how taxes are collected. Seeking to increase taxes on wealthy residents, the legislators simultaneously introduced a variety of proposals in their respective state legislatures last month. Here's what you need to know about the proposals.

What are wealth taxes?

The basic idea behind a wealth tax is to raise additional funds through tax initiatives that largely affect the most affluent taxpayers. But while the timing of the new bills was coordinated, the proposals differ significantly from state to state.

Lawmakers in many states are seeking a change to the capital gains treatment of assets, which are currently taxed at a preferential, lower rate than traditional income. Legislators in Connecticut, Hawaii, Maryland, and New York are seeking to raise the state capital gains rate by between 1% and 7.5%. Bills in California, New York, Washington, and Illinois would implement an unprecedented "mark-to-market" tax on unrealized capital gains.

Among the proposals are measures more obviously targeting the wealthy. Lawmakers in Connecticut put forward a bill to raise the income tax rate on higher earners. Meanwhile, legislators in California are proposing a tax on those with over $1 billion in assets. Additionally, Democrats in Hawaii, Maryland, and New York are proposing lowering the estate tax exemption.

What do opponents say?

As you might expect, wealth taxes are highly controversial. Opponents of the idea argue that wealth taxes are economically detrimental in theory and unfeasible in practice.

One argument against wealth taxes concerns the economic impact of taxing, either through "mark-to-market" or asset taxes, unrealized gains. Critics argue that without favorable tax rates, investors may lose a key incentive to invest in America's capital markets. An additional concern is that investors with highly appreciated stock or business interests may need to sell part or all of their investment or company in order to cover their tax bill.

Opponents also argue that wealth taxes will be difficult to enforce long term. Barring nationwide wealth tax initiatives, an affluent taxpayer living in tax-heavy California could easily move to tax-free Texas. While California lawmakers have anticipated such a move with a so-called "exit tax," the provision would likely be struck down in federal court.

Will these bills pass?

The prospects for these bills vary from state to state and bill to bill. While Democrats generally support raising taxes on the wealthy, some proposals may be a bridge too far for the more moderate members of the party.

An outright wealth tax based on taxpayers' assets may be a non-starter for many Democrats. Washington State's most recent wealth tax initiative did not pass, and a similar bill in California shows a lack of support thus far. Meanwhile, a proposal to raise capital gains in Washington State passed the legislature last year, and a similar bill in New York has garnered strong support.

While some of the more radical bills are expected to fail, the more moderate ones may have a better chance of passing. Regardless of the outcomes for these specific bills, however, it is important to note what legislators are signaling. Lawmakers at the state and federal level, on both the political right and left, are calling for radical tax changes. And that could indicate an appetite for sweeping tax reform in the near future.