Congress Democrats weigh higher taxes on wealthy after California levy falters

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Democrats weigh higher taxes on wealthy

Highlights

Democrats in Congress are advancing proposals to raise income and capital gains taxes on high earners, including Van Hollen's surtax plan lifting the top marginal rate to 49%.
California's Proposition 40, a one-time 5% billionaire wealth levy, is failing with 56% opposed, while Washington State voters approve a new 9.9% millionaire income tax.
Federal-level discussion includes Ro Khanna and Bernie Sanders' Make Billionaires Pay Their Fair Share Act proposing an annual 5% tax on net worth above $1 billion, signaling renewed wealth tax momentum.

Federal tax plans gain momentum

As reported by CNBC, tax experts say Democratic control of both chambers of Congress is likely to trigger a wave of proposals to raise taxes on high-income households and some businesses, even as California's ballot effort struggles to pass. Possible measures include higher income tax rates, surtaxes on million-dollar earnings and renewed attention to capital gains taxation.

Howard Gleckman, nonresident fellow at the Tax Policy Center, says Democrats are clearly looking at ways to cut taxes for middle-income households while increasing them for certain businesses and wealthy taxpayers, though he adds it is too early to know the final shape of any package.

Among the ideas already circulating are plans floated last year by Senators Chris Van Hollen and Cory Booker. Van Hollen's proposal calls for a graduated surtax on people earning more than $1 million, beginning at 5% for income between $1 million and $2 million and rising to 12% for income above $5 million, which would lift the top rate to 49% when added to the current 37% top marginal rate.

That plan would be paired with tax relief for lower and middle-income households through a new exemption of $46,000 for single filers and $92,000 for joint filers, while also raising the top capital gains tax rate to 35.8% from 23.8%. Booker's approach is similar but would raise the top rate to 43% and more than double the standard deduction to $37,500 for single filers and $75,000 for joint filers.

State votes shape wider debate

In California, Proposition 40 is likely to fail as vote counting continues, with 56% of voters opposing the measure and 44% supporting it. The proposal would impose a one-time 5% levy on the net worth of Californians worth more than $1 billion, and it also faces pressure from Propositions 41 and 42, ballot measures designed to block or restrict such taxation if either wins more votes than Proposition 40.

Service Employees International Union-United Healthcare Workers West, which backed the California proposal, all but concedes defeat and says it plans to try again in 2028 unless the legislature acts to make billionaires pay more. In other states, however, tax increases on the wealthy are performing better, with Washington State voters backing a new 9.9% millionaire tax on household income above $1 million a year, while Colorado's vote on replacing its 4.4% flat tax with a graduated system topping out at 8.4% on income above $1 million remains too close to call.

Tax specialists say broader Democratic ambitions could also extend to a federal wealth tax or a tax on unrealized gains. Representative Ro Khanna and Senator Bernie Sanders are promoting the Make Billionaires Pay Their Fair Share Act, which would impose an annual 5% tax on net worth above $1 billion, unlike California's proposed one-time levy.

Garrett Watson, vice president of federal tax policy at the Tax Foundation, says Democrats still face a difficult trade-off between new tax cuts for lower earners and the need for revenue to address deficits and spending priorities. Any plan is also likely to face a veto from President Trump, but tax experts say proposals introduced over the next two years could still shape the party's agenda and influence the tax debate heading into the 2028 election.

In our earlier article on rising U.S. Treasury yields and the expanding federal deficit, we explained how higher long-term rates are pushing up mortgage costs and federal interest expenses as annual budget shortfalls near $2 trillion. We also noted that political gridlock makes a near-term fiscal deal unlikely, meaning elevated borrowing costs could keep shaping the policy agenda.

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