Senate Finance Chair Ron Wyden released text for the first time Wednesday morning of his proposal to tax the yearly change in value of billionaires’ assets, detailing a plan to get at the wealth of the richest Americans that currently goes untaxed until assets are sold.

The tax on the value of billionaires’ stock holdings, real estate, art and other assets could help Democrats accomplish goals of raising taxes on the wealthy and funding social safety net and climate programs. The measure doesn’t have a formal cost estimate yet, but it’s expected to raise several hundred billion dollars over a decade.

The legislative text could win over some House Democrats and others who’ve framed the idea as too new and amorphous to get into the multitrillion-dollar budget reconciliation package Democrats are hoping to agree on soon. But it’s yet to be seen how skeptics will receive the draft.

Wyden told reporters Tuesday that the proposal addresses tax avoidance allowed by law. “What is legal is the scam,” he said.

Wyden cited the example of wealthy individuals borrowing money against stock holdings to invest and increase their wealth, which avoids selling the shares and paying tax on their increased value.

Democrats have also pointed to the massive untaxed wealth of people like Amazon.com Inc. founder Jeff Bezos who have built their fortune largely through company stock that grows in value without facing yearly taxes.

Wyden’s draft legislation would apply a new tax, beginning in 2022, for individuals with at least $1 billion in assets or $100 million annual income in three straight taxable years. It would apply to about 700 people, according to Wyden’s office.

It would create a “mark-to-market” system for taxing the gain or loss in value of stock, dividends and other tradable assets each year, according to a summary from Wyden’s office. At the end of the tax year, these assets would be subject to tax based on the change in their market value from the previous year. Any gain would then, in most cases, be subject to long-term capital gains tax of up to 23.8 percent tax rate under current law.

Capital losses

Under the proposal, a billionaire subject to the tax whose asset values take a dive during the year would have two options. They could choose to carry those losses forward to offset potential future mark-to-market gains, or carry them back to a year within the previous three to generate refunds for taxes paid on unrealized gains. Carrybacks could only offset prior mark-to-market tax, not taxes paid on other income.

For assets that aren’t traded on an exchange — such as real estate, closely held businesses, art or collectibles — an extra charge would apply when they’re sold in an attempt to even out the treatment of different assets. By waiting to tax those assets until they’re sold, there’s no need to value assets each year, which would be tricky.

Instead, an asset sold for a gain would be subject to capital gains tax plus a deferral charge meant to replicate interest payments on taxes that went unpaid each year, together totaling a tax capped at 49 percent.

The amount an asset’s value went up between when it was bought and sold would be spread across the intervening years, and a charge on taxes that would’ve been owed each year would be added equal to the minimum short-term interest rate the IRS allows for private loans, plus 1 percentage point, which would currently total 1.22 percent.

Reporting obligations would apply to pass-through businesses, including partnerships and S corporations, to provide billionaires with stakes in those firms with their share of any relevant gains or losses.

Special rules would apply to trusts, most of which would be subject to the tax if they have at least $10 million in income or $100 million in assets for three straight years — a lower threshold meant to avoid billionaires spreading wealth among trusts to avoid the tax.

Gifts, bequests and transfers made through trusts would trigger taxes unless they’re to a spouse or charity, and dynasty trusts set up to pass wealth through generations would have to pay taxes with deferral charges on property at least every 90 years.

Several rules would apply to phasing in the tax. When someone first falls under the tax and would likely pay a bigger levy, they can decide to pay in equal chunks over five years. They could at that time declare a gain of any amount on nontradable assets, lightening deferral charges down the road.

In the law’s first year, anyone subject to the tax could designate $1 billion of stock in a single publicly traded corporation as a nontradable asset, meaning they’d avoid yearly mark-to-market taxes on that chunk of shares but eventually pay a deferral charge if it’s sold. That’s meant to allow company founders to maintain controlling interests, according to Wyden’s summary, rather than have to sell shares in order to pay the tax.

New lease on life

Wyden originally released a broad outline of a similar but broader proposal in 2019 — applying to individuals with at least $10 million in assets and $1 million in annual income — which he intended at the time to finance a Social Security overhaul to keep the program solvent for decades.

But the tax has become a bigger focus for reconciliation in recent days after the revelation that Arizona’s Kyrsten Sinema, a crucial vote in the evenly divided Senate, wouldn’t support dialing up any corporate or individual income tax rates, including the capital gains rate Democrats planned to raise.

That’s led to interest in proposals favored by progressives once viewed as longshots to fund the package, also including a 15 percent minimum tax on earnings corporations report to shareholders released Tuesday.

Members of the House Ways and Means Committee have expressed skepticism about Wyden’s tax, citing concern about details of the proposal and a lack of text. Though some on the House side, including Congressional Progressive Caucus Chair Pramila Jayapal, D-Wash., were in full support of the tax this week.

Ways and Means Chairman Richard E. Neal, D-Mass., said Tuesday his committee would get an update from staff on the legislative text when it was released. “And then we’ll have to just see what the traffic will bear,” he said.

When ‘billionaires cry’

The American Enterprise Institute’s Kyle Pomerleau said in an interview ahead of the text’s release that while aspects of the tax code have mark-to-market features, what’s new about Wyden’s proposal is it’s broader in scope and meant to transform how capital gains are treated to tax them more like income.

“It is a big, fundamental change in that respect,” he said.

Pomerleau said that if Wyden’s proposal is enacted, a broader mark-to-market system down the line could allow for a higher tax rate on capital gains. That’s been difficult without repealing “stepped-up basis” — which resets the taxable value of assets when they’re inherited — because it could then incentivize people to hold onto assets until they die to avoid taxes. In mark-to-market, they’re taxed annually regardless.

Chuck Marr of the Center on Budget and Policy Priorities, a former Democratic aide, said in an interview ahead of the legislation’s release that it would only apply to a small sliver of the population. “It’s a new idea,” Marr said. “It makes it more manageable.”

Marr emphasized the proposal is not a wealth tax, and Wyden has also made a distinction. Some have raised questions about a legal challenge under the U.S. Constitution’s 16th Amendment, which grants the federal government power to levy income taxes

The Tax Policy Center’s Steve Rosenthal, a former Joint Committee on Taxation counsel, said whether it’s constitutional remains a question, particularly under the current, more conservative Supreme Court.

Rosenthal worked on drafting a mark-to-market accounting method for securities dealers in current law, which Wyden cited as precedent for what he’s doing. Rosenthal said that measure doesn’t affect assets in the same manner and was easier to apply.

Sen. Elizabeth Warren, D-Mass., who discussed support for the tax on billionaires’ assets alongside Wyden, rejected the idea it could be unconstitutional and the suggestion this and other revenue-raisers being discussed for reconciliation are new concepts. She pointed to years of work by Wyden and herself on the billionaires and corporate minimum tax respectively.

“I’ve even made billionaires cry over this,” she said.

When she was campaigning for the Democratic presidential nomination in 2019 in part on a wealth tax, billionaire hedge fund manager Leon Cooperman got a little choked up during a CNBC interview talking about the impact of Warren’s policies. Warren later used the incident as a campaign talking point, even selling coffee mugs labeled “Billionaire Tears.”