The Constitutionality and Application of New York’s Proposed Mark-to-Market Tax

The state of New York has proposed legislation that would implement a mark-to-market taxation system for its’ billionaire taxpayers. The proposal would tax billionaires on the increase in value that their assets have experienced over the past calendar year, whether or not these assets are sold. The tax would raise significant revenue for the state by eliminating the ability of taxpayers to hold assets until death to receive a “stepped-up” basis. Other policy reasons espoused in support of the tax are that it increases fairness and better reflects actual income. However, there are skeptics of the feasibility and constitutionality of the proposed tax. First, it will be extremely difficult to determine a market value for each asset for purposes of determining the taxpayer’s unrealized appreciation on each asset. Because of this, there will undoubtedly be numerous challenges by billionaire taxpayers to government valuations of the market value of their assets.There are also concerns regarding whether the tax violates a taxpayer’s constitutional right to travel and right to equal protection under the laws. Further, there are unresolved complications with existing law, including how will the tax handle income from federal retirement accounts and the complexity of basis and credits for taxpayers with properties outside of New York. Those in favor of the tax will focus on the increased revenue generation and policy concerns, while those in opposition will likely stress the complexity associated with administering two different tax systems at the same time. The tax proposed by New York could be a signal of change to come, as many states look to increase revenue in the wake of COVID-19.