If one had to identify the single greatest mystery in American politics today, it would undoubtedly be the growing desire of so many blue state legislatures to impose wealth taxes — the same policy enacted by many European countries prior to 1990 and subsequently repealed by almost all of them. What the French, Swedish, Irish, and six other governments finally realized is that wealthy people can tolerate having their incomes taxed at progressive rates; but when what is left over is taxed again, they will move to places where the fruit of one’s labor is more respected — taking their businesses, investment capital, entrepreneurial talent, and civic generosity with them.
[B]oth the left and the right share very similar views about what is in store for many of the country’s blue cities and states.
Why then would the elected Democrats who run blue states want to risk enacting such discredited policy?
The answer does not become clear until we consider wealth taxes from the perspective of the Democrat Party’s two most reliable financial and organizational backers, the public employee unions and government subsidized nonprofits. With ever-growing city and state budget deficits threatening to force spending reforms which even their political allies cannot in the end prevent, the unions and nonprofits have been forced to develop a strategy to minimize how much they will be forced to sacrifice.
That a wealth tax would be part of this strategy might at first seem improbable. After all, if putting a levy on the assets of rich people and big corporations only causes them to flee to friendlier jurisdictions, would not doing so just accelerate the day when the budget of a troubled city or state finally has to be trimmed? As Urban Reform Institute executive director Joel Kotkin recently observed, the rich and ultra-rich “are all that stands between the [blue states] and fiscal disaster. Without their outrageous income, the whole system tilts toward failure.”
But what if the fiscal reckoning which the unions and nonprofits fear is already close enough that the long-term consequences of wealth taxation will never be a political problem? In other words, if the coming negotiation over how much — and with what supervision — a given city or state government will be allowed to spend occurs well before the true impact of having taxed assets ever becomes an election issue? In that case, pretending that a wealth tax it good for the local economy not only gives Democrat legislators the ability to reap a short-term revenue windfall but also an excuse to expand the size and scope of existing public programs.
And while such a spending boost would only be temporary, it would at least give unions and nonprofits the ability to enter negotiations on the post-crisis preservation of their priorities from a much higher base line. With the result that these groups would likely come out of a city or state reorganization with much more than if they had never passed wealth taxes.
Needless to say, using wealth taxes to deal with a looming city or state fiscal crunch is a tactic that requires careful timing. Start pushing for them too early and advocates run the risk of being blamed for their worst consequences. Not the immediate loss of a few well-known billionaires, whose flight to Florida or Texas can always be demagogued as a civic improvement, but the job losses and cuts to public services which result from the thousands of mere multi-millionaires later following them.
That is why during Covid, when some far-left activists were already floating the idea of wealth taxes, most public unions and nonprofits declined to endorse it. With Congressional Democrats passing a Covid bill (the American Rescue Plan Act) worded to let blue cities and states siphon off enough money to keep solvent for a few more years, going for wealth taxes still seemed premature.
The fact that public unions and nonprofits are no longer hesitant tells that an important, if largely unrecognized, political transformation has occurred. After years of dismissing endless warnings that unchecked spending would invariably throw many of their governments into a fiscal crisis, those factions most responsible for the predicted crisis not only agree that it could indeed happen but believe that it will likely happen soon.
In other words, their leaders have concluded that the coming financial reorganization of overspending blue cities and states will occur well before they and their legislative allies would ever suffer for the long-term damage of any wealth taxes they now pass. Which means they are free to use such taxes to justify as much new spending as they have still time to enact.
(Anyone who doubts that wealth taxes are part of a public sector strategy to cope with looming city and state insolvencies has not paid enough attention to just how defensively government unions and nonprofits have been using their political influence in recent months. Even to the point of protecting themselves from their own members and staffers — those who will be hurt by the budget cuts which union and nonprofit negotiators fail to remove from reorganization agreements. Hawaii and Oregon are just two blue states which have recently passed bills designed to keep disgruntled public workers from attempting to replace their leaders.)
The implication of all this for fiscal hawks is that they should be doing a lot more than simply predicting the collapse of overspending blue legislatures, as accurate those predictions will turn out to be. They need to learn a lesson from what has happened to New York City — rescued from bankruptcy in October of 1975, well-run for a while under two mayors, but now facing a $10.4 billion deficit for FY2027 — and give more thought to policies which can keep the coming government restructurings from being just temporary band-aids.
The irony of the moment is that for all the talk about political polarization, both the left and the right share very similar views about what is in store for many of the country’s blue cities and states. The difference is that the left has a strategy for dealing with it while the right seems naively content to be able to brag, “I told you so.”
READ MORE from Lewis M. Andrews:
Trump’s Big Beautiful Bill Offers Housing Relief
Blue States Losing Out on Foreign Investment
Dem Dilemma: Far-Left Can’t Tolerate Winning Language
Dr. Andrews is former executive director of the Yankee Institute for Public Policy. His latest book is Living Spiritually in the Material World (Fidelis Books).
