You Can’t Fix Stupid
When Norway recently enacted a new wealth tax, it was billed as an easy way to make the rich “pay their fair share.” They packed their bags instead.
Within a year, hundreds of high-net-worth Norwegians fled the country, taking with them billions in capital, thousands of jobs, and a massive portion of the tax base. The exodus has been so severe that government revenue declined, serving as a case study in the inevitable response to bad tax policy.
Learning nothing, California is flirting with the same economic poison. A proposed “billionaire tax,” backed by the regional SEIU union, would impose a five percent levy on individuals and trusts with a net worth over $1 billion. While it’s billed as a one-time stopgap emergency measure to bolster safety net services, the proposed initiative is already hurting the California economy. As the New York Post reports:
The threat of a steep new wealth tax in California has reportedly prompted at least six billionaires including Larry Page and Peter Thiel to cut their ties with the state — and as many as 20 others could be heading for the exits.
The half-dozen billionaires made their moves before New Year’s Day — the cutoff date to avoid a potential one-time tax of 5% on fortunes exceeding $1 billion — which California residents will vote on in November, according to Bloomberg News.
David Lesperance, a tax adviser who specializes in relocating ultra-wealthy clients out of high-tax jurisdictions, told the outlet he personally helped four billionaires end their California residency before the proposal’s Jan. 1 cutoff date.
This exodus of capital and tax revenue comes on top of the outmigration of taxpayers already taking place in California. Over the past three decades, California has lost an eye-popping number of employers and businesses seeking to escape the state’s highest-in-the-country tax rates and general hostility to businesses and investment.
The result of these destructive policies is California is now the most economically imbalanced state in the country – lots of poor people, some very, very rich people, and a disappearing and distressed middle class. If this wealth tax moves forward, say goodbye to the wealthy, more angst for the middle, and more poverty for everybody else.
The shortsighted allure of easy revenue is not confined to The Golden State. Illinois recently considered going down this same road, floating a “tax on unrealized gains” that would have hit businesses and investors alike. The idea was ultimately shelved, but only after loud opposition.
Two years ago, we saw coordinated campaigns in Washington, New York, and other states where legislators introduced copycat wealth tax proposals aimed squarely at family businesses. As we warned at the time, it is as if they were intentionally trying to drive high-wealth taxpayers out of their states.
Just ask Connecticut, New Jersey, or New York, where each has seen an outmigration of high earners and business investment following their adoption of anti-investment policies.
The broader lesson is simple — there’s a reason our tax system focuses on taxing income, not wealth. Wealth taxes punish savings, the very fuel that drives innovation, creates jobs, and sustains communities. As we wrote a few years back, taxing wealth isn’t just bad economics – it’s administratively unworkable, constitutionally dubious, and economically destructive.
High-income entrepreneurs and investors in California already face the highest combined federal and state tax burden in the nation. Add a wealth tax to the mix, and more California taxpayers will do what the Norwegians did – move.
In the end, it won’t be the billionaires who pay the price. The businesses they finance, the workers they employ, and the communities they support will all feel the loss. California would do well to study Norway’s experience before repeating it. It is a really bad idea.
Wealth Tax Mania Spreads East
With California’s wealth-tax debate heating up, it appears Congress does not want to be outdone. New York Democratic Representative Dan Goldman has introduced a new tax aimed at appreciated property held by high-net-worth individuals. The legislation offers yet another chance to highlight why tax proposals targeting capital all suffer from the same fatal flaws.
Goldman’s Redistribution of Billions by Instituting New High-Income Obligations on Overlooked Debt (ROBINHOOD) Act would impose a 20-percent excise tax on loans secured by appreciated assets. When a taxpayer borrows against the value of stock, real estate, or a business interest that has risen in value, the IRS would treat the loan as a taxable event.
The bill targets the so-called “buy, borrow, die” strategy, but it extends far beyond the wealthy, applying to individuals making as little as $400,000 a year. So while the bill’s press release makes breathless references to Elon Musk, Jeff Bezos, and Warren Buffett, the real targets are the millions of Main Street businesses that routinely use loans backed by the family’s assets to finance growth, purchase equipment, cover operating expenses, and hire new employees.
In other words, the bill would tax the ability of entrepreneurs to access the economic value of an appreciated asset. It turns appreciation into a de facto tax base, just as a wealth tax would. If your business grows in value, the growth alone triggers a tax the moment you use it to obtain financing. The tax is triggered by appreciation, and it is unavoidable unless the owner refrains from using the business’s appreciated value altogether.
For Main Street businesses, these debates are far from abstract. Their “wealth” is typically locked inside the companies they have spent decades building. Imposing a tax that springs to life solely because an asset has appreciated would force business owners to sell stakes in their own companies simply to satisfy the IRS.
We’ve already seen the real-world consequences of these policies abroad. When Norway enacted its wealth tax, founders and investors left the country, taking jobs, capital, and future revenue with them. The policy eroded the tax base and harmed workers far more than it affected high-net-worth individuals, who have the resources to move elsewhere. A U.S. version of this policy would produce the same outcome, only on a much larger scale.
Representative Goldman’s proposal is the latest iteration of a concept that has been tried, tested, and failed, many times over. As states like California and members of Congress revive these ideas, the lesson remains the same: proposals that tax capital – whether in the form of wealth taxes or a tax on unrealized gains – inevitably miss their target and end up taxing Main Street instead.
Talking Taxes in a Truck Episode 46: Tom Nichols on the Backdoor Tax Hike That Needs to be Repealed
Our guest is Tom Nichols, partner at the Milwaukee-based Meissner Tierney Fisher & Nichols, longtime advisor to S-Corp, and author of an excellent new piece exposing the Section 461(l) Excess Business Loss limitation for the money-grabbing fraud it is. Tom walks through the provision’s origins, the harm it does to affected businesses, and how flawed revenue estimates drove the policy. We also get into our SALT Parity efforts and how the state laws and legal analysis he drafted helped pave the way for $20 billion in annual tax savings for Main Street businesses.
This episode of the Talking Taxes in a Truck podcast was recorded on December 18, 2025.
Taxing Losses
Tom Nichols, a shareholder at Milwaukee’s Meissner Tierney Fisher & Nichols and a longtime S-Corp advisor, is out with a great piece in Tax Notes that takes aim at the poorly-crafted Section 461(l) excess business loss limitation. “A Problematic Solution to a Nonexistent Problem” breaks down the provision, its real-world consequences, and the flawed policy rationale that led to its inception.
Prior to the Tax Cuts and Jobs Act, active pass-through business losses were used by owners to offset wages, investment income, and other business income. This treatment reflected the basic principle that income taxes should be paid on an accurate accounting of a taxpayer’s net income.
Section 461(l) flipped that principle on its ear by capping the amount of active losses that can be deducted in a given year, requiring any excess to be treated as net operating losses in subsequent years. As many have learned (particularly in the wake of the pandemic), this change can cause real and lasting harm. Here’s Tom’s example:
Suppose a wealthy entrepreneur owns a manufacturing business that is temporarily struggling and throwing off accounting and tax losses of $2 million per year. Suppose that same entrepreneur also has $3 million of investment income, perhaps from past earnings of that same business, and she is willing to use that investment income to keep the business alive…
In the absence of section 461(l)… she would have $1 million of taxable income, pay tax of $370,000 (at 37 percent), and still have $630,000 left over to spend or invest for the benefit of her own family, even after using $2 million of that investment income to keep the business alive. Enter section 461(l). If the entrepreneur is married, “only” $1.5 million of that loss from the ongoing business would be disallowed, thereby increasing the couple’s federal income tax by $555,000, for a total of $925,000, leaving the family with only $75,000 of real, after-tax income.
The excess loss limitation applies to pass-throughs only – consolidated groups organized under a C corporation face no such restriction when offsetting active losses with other streams of income. Why the disparate treatment?
Is there something fundamentally wrong with wealthy entrepreneurs using their investment income to fund the jobs and operations of businesses that are losing money? I don’t think so either, but that’s the “loophole” that section 461(l) is designed to close.
…Ever since section 461(l) was enacted, I have made numerous inquiries of Treasury, the IRS, the Joint Committee on Taxation, legislative staff, and other legal, accounting, and other tax professionals regarding the policy rationale behind this provision. I have yet to hear or read of anyone trying to defend this provision on policy grounds, much less a principled defense.
Section 461(l) was a clear revenue grab, but its ability to raise revenue was wildly overstated:
[T]he revenue projection for this new provision should have been small and reflect nothing more than a one- or two-year delay in the ability of business owners to recognize their losses. But that’s not what the initial revenue estimates by the JCT predicted. The JCT predicted that new section 461(I) would increase tax receipts by $9.5 billion in the first year and by amounts ranging from $16.2 billion to $20.4 billion annually for the next eight years. That stellar tax projection, totaling $149.7 billion for the entire 10-year budget window, presented a revenue offset that was apparently too big for Congress to resist when it enacted the Tax Cuts and Jobs Act.
S-Corp has critiqued these estimates since their inception, particularly as the provision has been repeatedly trotted out to offset unrelated spending. We were proven correct last year when revised estimates reduced the projected revenue by a factor of eight or ten. But by that time, Section 461(l) had already been extended twice, all with the promise of billions in new revenue that never existed.
Section 461(l) violates the rules of good tax policy, there is no rational for its existence, and it fails to raise significant amounts of revenue. It does, however, handicap family-owned businesses when times are tough by forcing them to pay tax on nonexistent income.
As Tom concludes, “Section 461(l) is bad policy and a poor revenue raiser. Congress should repeal it.”
CTA Setback
Breaking news from the Eleventh Circuit Court of Appeals. In a 3-0 decision issued this morning, a three-judge panel reversed our landmark district court ruling that the Corporate Transparency Act (CTA) was unconstitutional.
Readers will remember that district court victory as huge win for Main Street. It not only paved the way for additional successful court challenges, it also freed FinCEN to focus on new rules that limited the CTA’s scope significantly.
Unfortunately, today’s ruling goes in the other direction. Writing for the Eleventh Circuit, Judge Brasher concluded that the CTA falls within Congress’s power under the Commerce Clause:
We can safely say that the CTA facially regulates economic activity. The statute is specifically directed at domestic companies created under the laws of a state and foreign companies registered to do business in the United States… By requiring these corporate entities to provide beneficial ownership information, the CTA regulates how they operate and the level of secrecy with which they do business.
We are not sure about facially, but the CTA clearly does not regulate economic activity, or any other activity. The word “commerce” does not appear in the statute. The reporting requirements are triggered when a corporation is formed, not when it does anything. And many of the corporations targeted do not engage in commercial activity – they are personal residences and homeowner’s associations, etc.
At its core, the CTA identifies a large group of individuals – a 100 million or so “beneficial owners” – and requires them (or, more specifically, the legal entity they are affiliated with) to submit their personal information to assist with law enforcement – in this case cracking down on money laundering.
Nonetheless, the court also rejected Fourth Amendment challenges, finding that the CTA’s reporting requirements are reasonable because they’re uniform, limited in scope, and subject to privacy protections:
It is a uniform reporting requirement applied to all businesses that meet the CTA’s definition of ‘reporting company.’ There is nothing arbitrary or discretionary about its application… The information it requires is ‘sufficiently described and limited in nature’ and is no more detailed than the reports in Shultz.
When did “uniform” became a substitute for reasonable and warranted? Is an unconstitutional law exempt from scrutiny if it’s broadly applied? Moreover, the Court appears to hold that because some legal entities are engaged in illicit behavior, all legal entities (and their beneficial owners) can be treated as suspects. As S-Corp noted in a previously filed amicus brief, no other federal information-collection statute presents comparable privacy risks without significant protections against abuse.
The court’s casual treatment of serious constitutional concerns may help in the long run. A more rigorous ruling would be less likely to be granted cert, while their treatment of commerce clause and Fourth Amendment concerns is out of synch with the Supreme Court’s current membership.
The path to success just moved forward one step. It would have been better for the Eleventh Circuit to uphold the lower court’s ruling, but either way this issue was headed to the Supreme Court, and the weakness of today’s adverse ruling may be a benefit in the end.
Meanwhile, the interim final rule issued by FinCEN last spring remains in place. That rule exempted US companies and US citizens from the CTA’s reporting requirements. Treasury has promised to issue final rules within the year (Is that 2025 or twelve months? Not sure.) and S-Corp has been encouraging them to issue the rules and publicly purge the existing database of beneficial ownership information at the same time. According to FinCEN, about half the targeted 32 million entities filed under the CTA, and that data is still on the CTA’s books. Purge away is what we say.
Today’s reversal is disappointing, but it’s not the end of the story. The limited scope of FinCEN’s current rules combined with continued legislative advocacy and potential Supreme Court review means we have multiple paths forward. Much more to come.