Abstract: 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.

Table of Contents
II. The Proposed Mark-to-Market Tax
 A. Mechanics of the Tax 
 B. New York Billionaire Taxpayer Example 

III. Policy Behind the Mark-to-Market Tax 
 A. Increased Revenue Generation 
 B. Increased Fairness 
 C. The Mark-to-Market Approach Better Reflects Income 

IV. Complications in Administering the Mark-to-Market Tax 
 A. Difficulty in Determining Market Value 
 B. Likelihood of Disputes 

V. Federal Constitutional Issues 
 A. Right to Travel 
 B. Equal Protection 

VI. Existing Law Complications 
 A. Federal Retirement Account Issues 
 B. State Basis and Credit Issues 

VII. Arguments For and Against New York’s Mark-to-Market Tax
 A. Arguments For the Tax 
 B. Arguments Against the Tax 

VIII. Conclusion 

I. Introduction

The United States’ Federal income taxation system has several requirements for one’s monetary gain to be taxable, one of these requirements is the realization doctrine.[3] This doctrine requires an objective identifiable event, such as a sale or other disposition of property, that creates the appropriate time to tax.[4]  As a result, the mere appreciation of property is not taxable under the federal income tax system due to the lack of a realization event.[5] If a taxpayer wants to avoid their economic gain due to appreciation from becoming subject to the federal income tax, they can simply choose to not sell the property. A common strategy employed by wealthy individuals is to allow the property to pass to another, likely a family member, at death.  When the property passes at the decedent’s death, the person acquiring the property receives a “stepped-up” basis equal to the fair market value of the asset at the time of the decedent’s death.[6] This stepped-up basis allows the property’s appreciation to avoid ever being subject to state or federal income tax.

States have become increasingly concerned with the amount of money escaping inclusion in the tax base, with revenue losses associated with the stepped-up basis rule estimated at near $50 billion in 2018.[7] Additionally, COVID-19 has negatively impacted state and local income tax revenues, with projections of declines of 7.5 percent in 2021 and 7.7 percent in 2022.[8]  Given these budgetary concerns, there is motivation for states to seek to expand the tax base.  Moreover, states are allowed to decouple their tax computation from the federal computation, allowing for them to make alterations.[9] As a result, New York has proposed a change to their state income tax law altering when unrealized appreciation and deferred income would be treated as taxable income for billionaires.

The mark-to-market tax proposed in New York 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.[10]  An individual’s net worth would be assessed on the final calendar day of the year to determine if the taxpayer’s net assets exceed one billion dollars.[11]  Under this proposal, the assets of the taxpayer, their spouse, minor children, and trusts which the taxpayer is a beneficiary of, along with assets contributed by the taxpayer to private foundations and assets transferred by gift within the past five years would be considered in determining if the taxpayer is a billionaire.[12]  Additionally, this date would be used to determine the taxpayer’s gain or loss based on the change in value of the asset over the previous calendar year.[13]  Importantly, the basis of each individual asset would not be altered in the event of an actual sale, despite the inclusion of this appreciation in the taxpayer’s income.[14]

As a result of this proposal, the appreciation of a billionaire’s assets and property would not avoid inclusion in the tax base.  This timing change in recognizing income for billionaires from unrealized appreciation and deferred income would lead to far greater tax revenue for the state.  However, several constitutional concerns may arise from this proposal, which are likely to be raised by those in opposition of the bill, including the right to travel and equal protection.  This article will explain the mechanics of the proposed mark-to-market tax, policy behind the mark-to-market tax, complexities in administering the tax, the federal constitutional issues associated with the proposal, complications created by existing law, and the possible arguments in support and opposition of the tax.

II. The Proposed Mark-to-Market Tax

A. Mechanics of the Tax

The proposed legislation would create a tax on the unrealized appreciation of New York billionaire residents’ assets.[15]  The proposed legislation directs the State of New York to determine how much those unrealized capital gains have increased in market value since the billionaire has been a New Yorker, and then tax that increase in value at the normal income tax rate.[16]  For most of these individuals, that would mean a tax at the standard top income tax rate—8.8%—and repeat the process every year with a deemed sale.[17] Taxpayers would have the option to pay this new tax over a period of ten years with a 7.5% annual interest charge.[18]  For billionaire residents of New York for fewer than five years, the basis used to determine gain would be adjusted to the fair market value on the date that they became a resident.[19]  The tax works by determining the amount the taxpayer’s assets fair market values have increased over the prior year.  The fair market value is defined as “the price at which such asset would change hands between a willing buyer and willing seller,” both of whom are not under any pressure to complete the transaction and possess reasonable knowledge regarding the asset.[20]

The amount that the billionaire taxpayer’s assets have appreciated over the past year would be included in the taxpayer’s income for purposes of the state’s tax base.  While this may seem like a small change, if the mark-to-market tax had been in place in 2020 it is estimated that the state of New York would have raised an additional $23.2 billion.[21]  Given the budgetary concerns addressed earlier, it is apparent why New York, and likely more states in the future, are interested in moving away from the realization doctrine and towards the mark-to-market tax.  An example has been provided below to create a clearer picture of the practical effect that the mark-to-market tax will have on billionaire taxpayers.

B. New York Billionaires Taxpayer Example

Taxpayer (TP), is a billionaire resident of New York for more than five years.  TP owns several assets that have experienced substantial appreciation over the past year.  TP owns real property that has appreciated from $10 million to a fair market value of $11 million, stock of a publicly traded corporation that has appreciated from $500,000 to a fair market value of $750,000, and a second real property asset that has appreciated from $1 million to a fair market value of $5 million.  As a result, the taxpayer would include the $1 million appreciation on the first real property asset, the $250,000 appreciation from the publicly traded corporation’s stock, and the $4 million dollar appreciation from the second real property asset as income for purposes of the New York mark-to-market state income tax.  Thus, TP includes $4.25 million additional realization for state tax purposes.  Taxed at the 8.8% bracket, TP pays $374,000 in additional tax on unrealized and unmonetized gains.

Under the realization doctrine, this appreciation would not be included in the tax base until there was a sale or other disposition of the assets.  Further, the taxpayer would likely hold the property until death to have the property receive a stepped-up basis.  As a result, the asset’s appreciation would avoid taxation once it receives a stepped-up basis.  This holding tactic employed by taxpayers allows for a massive source of revenue to escape the state’s tax base, which would be alleviated by implementing a mark-to-market regime.  The mark-to-market approach targets this otherwise unrealized appreciation and implements an additional state tax.

III. Policy Behind the Mark-To-Market Tax

The main policy arguments for adopting a mark-to-market taxation system are to increase revenue, increase fairness, and that it more effectively reflects income.  The mark-to-market tax is seen as an avenue to much-needed increased revenue, as a way to curb wealth inequality, and better reflect the actual income that a taxpayer has experienced over a specified time period.  Those who support the mark-to-market tax see it as an improvement in these areas, when compared to the realization doctrine.

A. Increased Revenue Generation

The primary driver behind a mark-to-market tax, especially one focused on billionaire taxpayers, is to generate additional revenue.  Given governmental expenditures, a change in the tax system would ideally generate revenue at the same rate or a greater rate.  The mark-to-market tax can certainly maintain revenue levels, and would almost certainly result in increased revenues.[22]  This is because the appreciation of assets that once would have been exempt from inclusion in the tax base would now have to be included.  The incentives for holding property until death in order to receive a stepped-up basis will have been removed.[23]  Additionally, this would increase the market for real estate and other assets, as billionaire taxpayers would be far more willing to entertain selling assets prior to death under a mark-to-market regime.

B. Increased Fairness

A second major policy point thought to be addressed by a mark-to-market taxation is to increase fairness.  Proponents of the mark-to-market tax tend to view the realization doctrine as a major source of unfairness in the United States tax system.[24]  Those who view the realization doctrine as unfair focus on three key issues that they view as being better addressed by a mark-to-market tax: wealth inequality, vertical equity, and horizontal equity.[25]  The wealth inequality issue is thought by some to be exacerbated by the realization doctrine because there are planning opportunities that lead to the asset’s appreciation avoiding taxation.[26]  As a result, this appreciation is never taxed by the government and cannot be a part of any redistributive effort by the government.[27]  This concern would be alleviated by the New York mark-to-market proposal, as billionaires would not have the same planning opportunities that they have employed under the realization doctrine in the past.

The second and third fairness concerns relate to treating similarly situated individuals the same and treating differently situated people differently based on their differing abilities to pay.[28]  A criticism of the realization doctrine is that it violates horizontal equity by allowing individuals with the same amounts of income to face different tax implications based on whether this income is in the form of wages or from asset appreciation.[29]  This would not be the case under the New York mark-to-market system because wages and appreciation of assets would both be included in the tax base, without the need for a sale or other disposition.

On the other hand, vertical equity is violated for similar reasons, as higher income taxpayers would generally have more income from asset appreciation and lower income taxpayers would have a higher percentage of their income earned from wages.  As a result, the higher taxpayer, with likely more asset appreciation, is not taxed on this gain.[30]  Yet, the lower taxpayer, whose income is primarily earned through wages, is subject to tax liability.[31]  The mark-to-market approach would eliminate this advantage for billionaire taxpayers and treat their income earned from asset appreciation identical to the way their income from wages is treated under the realization system.

C. The Mark-to-Market Approach Better Reflects Income

Many tax scholars and commentators find that the mark-to-market approach reflects actual income better than the realization doctrine.[32]  This is because the mark-to-market approach is not limited to wages and assets that have been subject to a sale or other disposition.  As a result, the approach does a better job of showing what the taxpayer’s actual income was.  Additionally, the mark-to-market approach does not disincentivize the disposition of assets like the realization doctrine does.  This allows the taxpayer to act with less influence and pressure from tax law than the taxpayer currently experiences under the realization doctrine.[33]  This concept pertains to the “efficiency” of a tax system.  To determine whether a tax system is efficient, one should look to whether taxes “distort investment or business decisions.”[34]  Given this criteria, the mark-to-market approach would appear to be more efficient than the realization doctrine because it would not distort investment and business decisions as much.  Taxpayers are not overly incentivized to hold assets until death when the mark-to-market approach is employed.

However, there is a strong argument against the inclusion of asset appreciation in income and that the mark-to-market approach is not more efficient.  The reason for this is concerns with liquidity.  When there is a tax imposed on the mere appreciation of property, the taxpayer may be forced to sell the asset to afford the tax.[35]  This is because even though the taxpayer’s assets have experienced substantial appreciation, these assets and wealth are illiquid unless sold.  Even though the affected taxpayers under the New York proposal would be billionaires, they may not have the requisite liquidity to pay income taxes based on substantial appreciation of assets.  As a result, the mark-to-market tax would be distorting the investor’s decision and forcing them to sell assets to afford their income taxes.

IV. Complications in Administering the Mark-to-Market Tax

Despite the policy reasons advocated by those in favor of the mark-to-market tax, implementation of such a tax would be extremely complex.  The primary reason for this is the difficulty in accurately placing a value on assets to represent appreciation over the applicable time period.  This skepticism primarily concerns the inability to determine the market value of an asset without an actual sale or disposition of property.

A. Difficulty in Determining Market Value

It is important to determine the fair market value of the taxpayer’s assets annually in order to properly administer a mark-to-market tax.  However, this value can be troublesome to establish without some sort of sale or other disposition.  Further, the primary criticisms of any mark-to-market system are the issues and uncertainty of asset valuation.[36]  The success of the mark-to-market approach rests on the notion that there is an objective and knowable market value for assets.[37]  However, this is far easier said than done, leaving aside the feasibility of the undertaking, it would be costly for authorities to monitor the market and value of each billionaire taxpayer’s assets on an annual basis.[38]  The proposal states that fair market value is “the price at which such asset would change hands between a willing buyer and willing seller,” however, this value can be hard to determine when there is guesswork involved in what the willing buyer and seller would agree to.[39]

One of the supposed primary benefits of a mark-to-market system is that it more accurately represents income; however, if the valuations are inaccurate this advantage is negated.[40]  Additionally, it would be difficult for the government to ensure that taxpayers are not systematically undervaluing their assets.[41]  As a result, the policy justification of raising additional revenue could, at the very least, be diminished.  Another difficulty in properly valuing assets under the New York proposal is that the assets of a billionaire may be so expensive that there are not comparable assets that are being exchanged in the marketplace that would be helpful in determining the asset’s market value.  Additionally, as a privacy-related policy consideration, the level of disclosures required to permit the taxation of the variety of assets held by billionaires means previously privately held assets may have to be openly shared to taxing authorities and exposing such assets to cyber-attack, potential theft, or other misuse.

B. Likelihood of Disputes

Given the uncertainty in properly valuing New York billionaires’ assets, it is extremely likely that there will be challenges and disputes arising from the differences in opinion between the taxpayers and the government.  This is because many forms of wealth are difficult to value, such as personal effects and future pension rights.[42]  Additionally, the taxpayers subject to the mark-to-market taxation, billionaires, would certainly have the means to contest and fight valuations that they thought to be inaccurate.  Additionally, the billionaire taxpayers could raise these valuation challenges to bring to light the administrability issues involved with the tax and to voice their displeasure with being made subject to the tax.  New York’s billionaire taxpayers could choose to make the tax more burdensome to administer by contesting the valuations of each of their numerous assets.  These individuals lose nothing by contesting what amounts to a surprising and significant tax, whereas the State of New York could lose on expenses of collection and use of these funds through lengthy contests, administrative fees, court costs, and enforcement actions.

V. Federal Constitutional Issues

A. Right to Travel

One of the possible constitutional challenges that may be raised in opposition of the mark-to-market tax is the implications the tax will have on the right to travel.  This right has been described by the Supreme Court as a “liberty” that cannot be deprived without due process of law.[43]  Additionally, a state law implicates the right to travel when the law uses “any classification which serves to penalize exercise of that right.”[44]  In regard to the mark-to-market tax, the proposal could arguably be viewed as penalizing those who exercise their right to travel.  For instance, there are numerous unanswered double taxation issues that could arise.  If a taxpayer lives in New York while holding an appreciated asset in another state, it is possible they would have been taxed in New York for the appreciation on the asset and then taxed in the state the asset resides upon its sale or disposition.[45]  This type of double taxation issue would certainly penalize taxpayers who own appreciated assets in one state and want to or do move to New York.

More generally, there is an argument to be made that the adoption of the mark-to-market tax, even if the double taxation issue is resolved, penalizes billionaires who exercise their right to travel.  Taxpayers who would be subject to the tax will be disincentivized to move and reside in New York to avoid being subject to the new tax.  However, this argument has a distinct weakness, state laws that have drawn the Supreme Court’s ire recently involve classifying residents based on when they established residence and apportioning unequal rights based on this, “among otherwise qualified bona fide residents.”[46]

The mark-to-market tax does not do this, instead, it tries to make the effects of the tax even regardless the length of time the taxpayer has been a resident of New York.  The tax allows taxpayers who were not residents of New York for the preceding five years to adjust the basis of their assets to the fair market value of the asset on “the last day of the last tax year” before they became a New York resident.[47]  This basis adjustment would only be for purposes of the mark-to-market tax and would not apply in the event of an actual sale.[48]  This allows each of the billionaires to only be taxed on gain that their assets experience while the taxpayer is a resident of New York.

There are right to travel challenges available to those in opposition of the mark-to-market tax.  These arguments will be more persuasive if the double taxation issue is not addressed in future versions of the proposal.  However, even resolving the double taxation issue will not completely eliminate the availability and legitimacy of these challenges.

B. Equal Protection

Another avenue for opponents to challenge the proposed mark-to-market tax is through the equal protection clause.  This clause is contained in the Fourteenth Amendment to the United States Constitution, and states that no person within the United States shall be denied “within its jurisdiction the equal protection of the laws.”[49]  The courts have interpreted this clause to mean that all persons “similarly situated shall be treated alike.”[50]  In this situation, billionaires subject to the tax could make the argument that they are being deprived of equal protection of the law by being subjected to a completely different system of taxation.  Further, this is not simply a higher rate of taxation under a progressive rate system, but a complete departure from the realization doctrine for only a portion of the populace.  The argument would likely be that as a New York citizen they are similarly situated to the rest of New York taxpayers, and that being subject to a mark-to-market tax system as opposed to the realization doctrine deprives them of their right to equal protection of the laws.

On the other hand, proponents of the tax would have strong defenses to this argument based on previous decisions of the Supreme Court.  Generally, states are given “great leeway” regarding taxation when it comes to equal protection concerns.[51]  The limit to this leeway has been described as when the difference in treatment amounts to invidious discrimination or if the distinction is palpably arbitrary.[52]  Similarly, the Supreme Court has also held that legislation will be presumed valid and will be upheld so long as the classification is “rationally related to a legitimate state interest.”[53]  If the court were to simply look to whether there was a rational relation to a legitimate state interest the proposal would almost certainly pass this test.  The reason for this, as outlined earlier, is a need for increased revenue for the state of New York and this proposal would help to alleviate this issue.

When it comes to the equal protection particular to tax classification, the constitutionality can only be overcome by “explicit demonstration” that the classification is “hostile and oppressive discrimination.”[54]  This would seem to be a high bar to meet, but selectively utilizing mark-to-market taxation for only a portion of residents may be enough to meet this bar.  Opponents of the mark-to-market tax would be able to argue that billionaire taxpayers are being hostilely and oppressively discriminated against in New York by being subjected to a completely different system of taxation, which is no longer dependent on the realization doctrine and is not employed by any other state in the United States.

VI. Existing Law Complication

A. Federal Retirement Account Issues

One area of complexity for the implementation of the New York mark-to-market tax would be its interaction with retirement accounts and assets.  Commonly used retirement accounts include individual retirement accounts (IRAs) and 401k plans, which allow taxpayers to defer taxes until a later point in time, generally retirement.  Tax deferrals are beneficial to taxpayers because they allow for tax-free growth, and when the tax is incurred, the taxpayer’s earnings and taxes will likely be lower.[55]  The proposal is silent on whether or not retirement accounts and asset appreciation will also be taxed in the same manner as the asset classes explicitly listed.[56]  Further, if the unrealized appreciation of retirement assets are subject to the mark-to-market tax, where does the money come from?  Will the taxes be taken directly from the retirement accounts?  If the state does decide to tax these assets then this would certainly lower the amount of deferred income that taxpayers are allowed to carry forward.

Depending on the type of retirement account, taxpayers are normally taxed on retirement assets when they begin to withdraw from these accounts, typically upon retirement.[57]  If the New York mark-to-market tax were to tax unrealized appreciation on these assets prior to retirement, this would create a conflict with federal income tax deferral until retirement.  This is an important area that lawmakers in New York will need to consider and address in subsequent versions of the mark-to-market legislation.  There needs to be a policy decision articulated regarding retirement accounts and assets.  The most easily administrable policy decision would be to make retirement assets exempt from the mark-to-market tax, thus avoiding the conflict with federal income tax deferral.

B. State Basis and Credit Issues

The adoption of a mark-to-market tax leads to increased complexity for taxpayers in calculating the basis of their assets held in New York, as well as in states other than New York.  Each year the taxpayer’s assets would undergo a basis change, which would be necessary to calculate the appreciation over the past calendar year.  As mentioned earlier, the proposal allows for New York residents to adjust the basis of their property to the fair market value of the property on the date they became a New York resident.  This adds an increased layer of basis complexity, the taxpayer would have one basis for purposes of the mark-to-market tax, the fair market value on first day as a New York resident, and a second basis for purposes of the New York income tax.[58]  This would be the case so that taxpayers could not move to New York, accept a heightened adjusted basis and then sell the asset to minimize gain.  The complexity increases for any New York billionaire resident’s assets outside the state of New York.  The taxpayer would have an adjusted basis in New York reflecting either the fair market value at the beginning of their residency or the inclusion of unrealized appreciation already taxed. Yet, the asset’s basis in the state which it is held would remain unchanged because there would not be an adjustment for imposition of the mark-to-market tax as there is in New York.

Additionally, the mark-to-market tax proposal creates a number of complexities when it comes to state basis and credit issues, especially as it pertains to the proposal’s interaction with other state income tax systems.  As discussed earlier, the issue of double taxation is a critical issue that goes largely unaddressed in New York’s proposal.  The only portion of the proposal addressing this issue simply allows for a credit where a taxpayer has already been taxed on the gain by a state or jurisdiction they were a resident of prior to becoming a resident of New York.[59]  However, this provision is of little value, because the mark-to-market tax in New York would be assessed before any duplicative tax utilizing the realization doctrine.[60]  As a result, there is a distinct need for the proposal to be amended to address this issue.

There are several options that New York could implement to curtail this issue, including: offering a credit for duplicative taxes incurred, offering a tax refund for duplicative taxes incurred after the mark-to-market tax, or they could hope that other states implement a mark-to-market style income taxation system.  Currently, the New York mark-to-market proposal lacks a solution for this credit issue and this is something that needs to be addressed in the next version of the proposal.

VII. Arguments For and Against New York’s mark-to-Market Tax

There are sure to be strong opinions on both sides of the issue of whether to support or oppose New York’s mark-to-market tax proposal.  The proponents of the tax will likely argue that it promotes larger policy goals better than the realization doctrine, raises much needed additional revenue, and that complexity is unavoidable in any tax system and is minimized by the proposal.  On the other hand, those in opposition of the tax will likely focus on the difficulties associated with valuation, the constitutional challenges mentioned above, and the advantages of sticking to the realization doctrine.

A. Arguments For the Tax

Proponents of the mark-to-market will likely argue that the proposal is superior to the realization doctrine when it comes to fairness, efficiency, and complexity.  As was discussed earlier, the realization doctrine is viewed by some as violating notions of fairness by treating those similarly situated differently and by not treating those who can afford to incur greater tax liability differently from those who cannot.[61]  Further, the realization doctrine influences the investment decision of taxpayers by incentivizing that they hold the asset until death so they can receive a stepped-up basis.  The mark-to-market tax eliminates this specific influence on investment and business decisions.

Proponents of the tax also argue that the proposal will also alleviate complexity created by realization doctrine.  The proposal would eliminate the necessity of keeping records regarding basis and depreciation.[62]  Additionally, complex realization based rules such as capitalization and depreciation could possibly be eliminated.[63]  A common political obstacle for mark-to-market proposals is distinguishing which items should be included in the mark-to-market regime.[64]

However, the proposal would not be in danger from this criticism as the proposal would include all the assets of New York billionaires being marked to market value.  Undoubtedly, opponents of the proposal will vehemently challenge the assertion that a mark-to-market system is less complex.  The complexity argument will likely be championed by both sides, it would be hard to implement a comprehensive tax system without a level of complexity.

B. Arguments Against the Tax

On the other hand, opponents of the mark-to-market tax will surely bring up the issues discussed earlier pertaining to valuation of taxpayer assets.  The difficulties associated with valuation could serve to undermine the policy advantages that the mark-to-market tax is argued to provide, increased revenue generation and more accurate reflection of income.  Similarly, opponents of the proposal will claim that the tax is unconstitutional and violates the right to travel and equal protection under the Constitution.

Moreover, opponents would stress the advantages of sticking with the realization doctrine and treating billionaire taxpayers like the remaining taxpayers.  Creating an entirely new system of taxation for a segment of the tax base will add increased complexity for the government.  Regardless of which system is ultimately less complex, the government would have to be able to administer both tax systems simultaneously to different portions of the population.  Additionally, critics will refute the purported policy advantages of the mark-to-market tax.  It is arguable that the mark-to-market tax could be just as inefficient as the realization doctrine, as taxpayers may have to sell assets to ensure they have sufficient liquidity to pay their income tax liabilities.

VIII. Conclusion

New York’s proposed mark-to-market tax would be a stark shift away from the realization doctrine employed by every other state as well as the federal income tax system.  The mark-to-market tax would provide an avenue to increase state revenue by bringing unrealized appreciation into the tax base that would normally avoid inclusion.  Additionally, the proposal would eliminate the effectiveness of taxpayers holding assets until death, allowing their decedents to receive a stepped-up basis.  This new approach to taxation would raise significant revenue for the state of New York, which is needed in the wake of COVID-19.  Additionally, proponents of the tax will view the tax as an improvement over the realization doctrine when it comes to fairness, efficiency, and as a reflection of actual income.

However, there are several possible challenges that opponents will raise in opposition of the tax, including possible violations of the right to travel and equal protection clause.  There are also legitimate concerns about the difficulties in valuing the assets of New York’s billionaire taxpayers.  Without a sale or comparable transaction, settling on a fair value to determine the annual appreciation of an asset will likely lead to billionaire taxpayers disputing the valuation reached by the government.  This issue could also lead to dispute in the inverse, with the government contesting taxpayer valuations as undervaluing their assets.  It is also disputed whether a mark-to-market tax is more efficient than a realization-based system, and this is because of liquidity issues and their possible effect on investment decisions.  Additionally, implementation of the mark-to-market tax would create several complications with existing law.  An unaddressed area of concern for the proposal is how it will treat taxpayer retirement status that enjoys federal income tax deferral.

The New York proposal creates additional complexity in calculating the basis of taxpayer’s assets that could lead to confusion for taxpayers.  Lastly, the proposal is noticeably lacking in solutions for potential double taxation issues that taxpayers will face, and this is an area that could be addressed through giving tax credits or refunds for duplicative taxes.  These concerns will need to be addressed in subsequent versions of the tax in order to ease concerns of those in opposition, and to enhance the likelihood of the legislation passing.

Article authored by:
Beckett Cantley and Geoffrey Dietrich