Yesterday the Senate Ways & Means Committee heard SB 5426, which would impose a wealth tax. The bill and its companion HB 1406 were originally introduced last year. Last year, the Department of Revenue (DOR) estimated that the tax would increase revenues by $4.949 billion in 2023–25 and by $4.830 billion in 2025–27.

Kriss wrote about the bill last year. In his post, he talked about how unlikely it was that wealth tax revenues would be collected at the level estimated in the fiscal note. First, no other state has a wealth tax, so there is no experience to draw from. Second, taxpayer behavior would considerably affect collections.

DOR released an updated fiscal note for SB 5426 yesterday. DOR now estimates that revenues from the wealth tax would be significantly lower than was estimated in 2021: $1.796 billion in 2023–25 and $3.253 billion in 2025–27. Part of the reduction is due to the assumption that the first tax payments would be due Oct. 15, 2024 instead of Oct. 15, 2023. However, when you look at just the first three years the tax would be in place under each fiscal note, the 2022 estimate is $2.351 billion lower than the 2021 estimate over those three years.

The reason for the change appears to be that DOR is assuming more behavioral changes in response to the tax. In the 2021 fiscal note, DOR assumed “that no taxpayers move out of state or take other actions to reduce their liability under the tax.”

That assumption was questionable. For example, a recent paper looked at what happened when all regions of Spain except Madrid levied wealth taxes. Within five years, “the stock of wealthy individuals in the region of Madrid increases by 10% relative to other regions.” (Opportunity Washington wrote about this paper here.)

The 2022 fiscal note assumes “increasing behavioral responses by taxpayers over time in a manner that reduces their tax liability.” Additionally, “The behavioral responses capture taxpayer behavior, implementation, and administrative efforts related to this new tax and range from 44% in Fiscal Year 2025 to 50% in Fiscal Year 2027.”

Similarly, the November 2021 revenue forecast estimated that capital gains tax revenues will be lower than estimated in the fiscal note. The new capital gains revenue estimate incorporates more behavioral effects than the original estimate.