In tax code ruling, U.S. Supreme Court declined to open ‘Pandora's box’

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A decision this week by the U.S. Supreme Court upheld a Trump administration tax provision. Many warned that a win by the plaintiffs in the case could have upended the tax code and cost state and local governments trillions of dollars.

At the center of Moore v. United States are foreign earnings and a provision in the 2017 tax reform called the Mandatory Repatriation Tax. The reform was intended to minimize the incentive for U.S. corporations to hoard money overseas by reducing certain taxes on foreign earnings. In exchange for those reductions, investors and corporations had to pay a one-time, retroactive tax on all foreign income dating back to 1986. The provision helped pay for some of the corporate income tax cuts included in the 2017 Tax Cuts and Jobs Act.

Charles and Kathleen Moore, who paid roughly $15,000 in taxes on their investment in an India-based company, decided to challenge the provision, contending that it amounted to a tax on unrealized income because they had not recouped their earnings from that investment. While acknowledging it had increased in value by more than a half-million dollars, they argued that because they had not yet received any actual money, they were being unconstitutionally taxed on unrealized income. (The Moores maintained that the tax was unconstitutional because the 16th Amendment only authorizes taxes on income.)

The case was viewed as an opportunity for the court to issue a preemptive strike against federal wealth taxes—such as President Joe Biden’s proposed Billionaires Minimum Income Tax—advocated by some Democrats. However, some warned the fallout from such a broader ruling could potentially have ramifications for various taxes that benefit state and local government coffers, including global intangible low-taxed income and property taxes.

All told, the revenue at stake was potentially in the trillions of dollars.

The Ruling

But the high court, by a 7-to-2 vote, rejected the Moore’s argument and upheld the Mandatory Repatriation Tax. They did so without addressing the constitutional question of whether unrealized gains counted as income for the purposes of the 16th Amendment. Instead, the justices ruled that the gains taxed were income for the foreign corporation because they were just income that remained undistributed to shareholders.

Writing for the majority, Justice Brett Kavanaugh said “the precise and narrow question that the Court addresses today is whether Congress may attribute an entity’s realized and undistributed income to the entity’s shareholders or partners, and then tax the shareholders or partners on their portions of that income. This Court’s longstanding precedents, reflected in and reinforced by Congress’s longstanding practice, establish that the answer is yes.”

The question of what counted as income, and to who, was a key point that arose during oral arguments in December. Back then, Kavanaugh noted that “the court could resolve this quite narrowly,” an approach that U.S. Solicitor General Elizabeth Prelogar later urged the court to adopt.

“It would be critically important for the court to do it through Justice Kavanaugh's approach,” she said. “That is, I don't think the court needs to resolve anything about whether the 16th Amendment requires realization.”

If the court explicitly defined the scope of unrealized income, she warned, “there are a number of critically important parts of the tax code that would [not stand up to that].”

Harvey Bezozi, a Florida-based accountant and federal tax law expert, told Route Fifty in December the court may not have initially intended to rule narrowly when taking up the case and noted that there was considerable pressure exerted by powerful conservative groups to have the case heard in the highest public forum. However, the line of questioning signals the justices' concern about opening “a proverbial Pandora's box of unfair accelerated taxation.”

“A narrowly applied ruling here,” he added, “would protect various other forms of unrealized income from being automatically included in taxpayers' taxable incomes and subject to immediate taxation.”

That’s what the court did by sidestepping the constitutional issue. That constitutional issue, however, remains an open question that a future court could decide if Congress were to ever enact a wealth tax.

Tax Foundation Senior Economist Alan Cole addressed that possibility in an analysis of the decision.

"Arguments made in the Moore case concern a very important topic: the scope of the 16th Amendment," he wrote. "A larger scope for the 16th Amendment could give a constitutional blessing to a variety of tax proposals, while a smaller scope for the 16th Amendment could have foreclosed those tax proposals, and struck down parts of the current tax code as well."

But, he continued, “given the narrow opinion of the court … it seems likely that future rulings under other facts and circumstances could favor taxpayers instead."

What Was at Stake for States

While the Moore case dealt with a federal tax, its implications both directly and indirectly would have affected state taxation.

Most directly, the Tax Foundation had said a "broader ruling could call into question various taxes that apply to foreign earnings, including global intangible low-taxed income (GILTI),” a new tax that was also part of the 2017 tax reform. GILTI income has been a focus of many state legislatures since its inception. While about half of states have decoupled from that part of the U.S. tax code and don't tax foreign intangible income, 11 states now tax it at the highest level and other states tax it to some degree.

The dollars at stake were significant. For example Minnesota, the latest state to establish a GILTI tax rate, estimates the tax will bring $437 million more to the state’s coffers during the 2024-25 biennium.

On the other hand, some state attorneys general argued that a broad ruling allowing a wealth tax could “crowd out” certain taxes that have been the domain of state and local governments, such as property taxes, which rely on the assessed value of a property, or use taxes.

“[T]his division of responsibilities would break down if suddenly the federal government can redefine ‘income’ to encompass even unrealized bumps in value,” argued West Virginia's Patrick Morrisey in a brief signed by 16 other Republican attorneys general. “If any item that can appreciate in value becomes fair game, bad things will follow.”

But a counter brief filed by Arizona Attorney General Kris Mayes and 16 other Democrat attorneys general called that argument “misguided speculation.”

Instead “there is the nonhypothetical, nonspeculative reality that rampant tax avoidance weakens state fiscs today,” they wrote, referring to states who have conformed their codes to directly tax mandatory repatriation revenue in an effort to join the federal codes in encouraging corporations to stop hoarding money overseas. They also point out that, far from making a federal grab at more taxes, the 2017 tax reform implemented sweeping tax cuts.

“Attacking the [mandatory repatriation tax] in isolation—notwithstanding the accompanying adoption of territorial taxation and overarching taxpayer relief—is like complaining about the cost of postage to claim a pot of gold,” they wrote.

Keep reading as there’s more news to use below, and if you don’t already and would prefer to get this roundup in your inbox, you can subscribe to this newsletter here. We’ll see you next week.

News to Use

Trends, Common Challenges, Cool Ideas, FYIs and Notable Events

• PARDONS: Maryland governor to pardon 175,000 marijuana convictions. Gov. Wes Moore issued a mass pardon of more than 175,000 marijuana convictions Monday, one of the nation’s most sweeping acts of clemency involving a drug now in widespread recreational use. The pardons, the Democratic governor said, are a step to heal decades of social and economic injustice that disproportionately harms Black and Brown people. Nine other states and multiple cities have pardoned hundreds of thousands of old marijuana convictions in recent years. But Moore’s pardons appear to stand alone in the impact to communities of color in a state known for having one of the nation’s worst records for disproportionately incarcerating Black people for any crimes. More than 70% of the state’s male incarcerated population is Black, according to state data, more than double their proportion in society. Meanwhile, New Jersey Gov. Phil Murphy signed an executive order Wednesday intended to speed clemency applications to his desk in hopes of extending pardons to thousands of New Jerseyans in and out of the state’s jails and prisons.


• SOCIAL MEDIA: New York to limit ‘addictive’ social media feeds for kids. Gov. Kathy Hochul on Thursday signed a bill that would allow parents to block their children from getting social media posts suggested by a platform’s algorithm, a move to limit feeds critics argue are addictive. Under the legislation, feeds on apps like TikTok and Instagram would be limited for people under age 18 to posts from accounts they follow, rather than content suggested by an automated algorithm. It would also block platforms from sending minors notifications on suggested posts between midnight and 6 a.m. The law does not take effect immediately. State Attorney General Letitia James is now tasked with crafting rules to determine mechanisms for verifying a user’s age and parental consent. After the rules are finalized, social media companies will have 180 days to implement the regulations.


• OVERSIGHT: Louisiana law lets officials ignore public records requests. Gov. Jeff Landry has signed into law a bill that allows government officials to ignore the state’s public records law without consequence. The law repeals a statute that previously allowed courts to consider custodian liability when a requester sued the government agency that withheld the records. The custodian could have been forced to pay a fine of $100 per day and the attorney fees of the person who was denied access to the records. Louisiana lawmakers have gradually chipped away at the state’s public records law, adopting hundreds of changes to revoke public access to a long list of government documents since it was enacted in 1940. Meanwhile, in a change transparency advocates describe as “very troubling,” Landry has signed a new law to give him control over the Louisiana Board of Ethics, even as a dispute between him and board members continues.


• RECYCLING: New Colorado program will make recycling free for everyone. Colorado is about to have a statewide free recycling program that will increase recycling access to hundreds of thousands of people. The bill creating the Producer Responsibility Program passed in Colorado two years ago, but this spring, state lawmakers gave it the green light to move forward. The program will require companies that package their products in single-use materials—like foods, beverages, and other items—to pay a fee, which will pay for everyone across the state who has access to curbside trash pickup to also receive curbside recycling pickup for free. According to a needs assessment study for the program, published in March, approximately 600,000-700,000 additional households will receive curbside recycling in municipalities and other areas. Additionally, the program will create free recycling for people living in multi-family housing. Programs like this have been successfully running in some European countries and Canada for years.


• PRIVACY: Vermont governor vetoes data privacy bill. Republican Gov. Phil Scott vetoed a broad data privacy bill that would have been one of the strongest in the country to crack down on companies’ use of online personal data by letting consumers file civil lawsuits against companies that break certain privacy rules. Scott said in his veto message late last week that the legislation would have made Vermont “a national outlier and more hostile than any other state to many businesses and nonprofits.” The legislation would have prohibited the sale of sensitive data, such as social security and driver’s license numbers, as well as financial information and health data. It also would have set meaningful limits on the amount of personal data that companies can collect and use. The Vermont Senate on Monday voted 15-14 to sustain the governor’s veto, which effectively kills the legislation.


• EQUITY: Chicago mayor launches task force on reparations. Mayor Brandon Johnson launched a task force Monday to examine implementing a reparations program for Black Chicagoans, casting the move as the latest step in his administration’s agenda focused on racial justice. Under the executive order, the commission will conduct an examination of “all policies that have harmed Black Chicagoans from the slavery era to present day and make a series of recommendations that will serve as appropriate remedies.” The announcement came after Johnson earmarked $500,000 in the 2024 budget toward studying the issue. Exploring a reparations program to undo the harms of slavery and segregation has been an idea floated across American cities, particularly in the wake of the 2020 racial justice uprisings over the police murder of George Floyd. Evanston has made some of the biggest strides in that vein, kicking off a program that provides $25,000 payments for Black Evanstonians affected by racial housing policies put in place by the city—though a conservative group last month filed a lawsuit accusing the initiative of being unconstitutional.


• WATER: Feds acknowledge dams devastated Northwest tribes and fish stocks. The federal government this week acknowledged that the construction and operation of 11 hydroelectric dams on the Columbia and Snake rivers during the last century has had a devastating effect on eight Northwest tribes and more than a dozen native fish stocks, some of which have gone extinct. The acknowledgement came in a report that was published Tuesday, and it represents the first time that the U.S. government has comprehensively detailed the harm that federal dams have caused and continue to inflict on Northwest tribes. White House officials this week also announced the creation of the Columbia River Task Force to coordinate interagency and tribal work on restoring wild fish stocks in the basins during the next decade. 


• ECONOMIC DEVELOPMENT: Efforts to build an “airport city” are now official. After years of discussions and planning, a metro-area partnership has declared efforts to build out an aerotropolis—an airport city—around Denver International Airport officially off the ground. A website for the Colorado Aerotropolis pitches the region to “makers and manufacturers, builders and developers.” At the heart of the appeal is DIA, the third-busiest airport in the U.S. and the sixth-busiest in the world. An aerotropolis is designed to place cities around a central airport, leveraging the connectivity that air travel provides. There are about 16 such developments around the world. A public-private partnership is behind an aerotropolis in Atlanta, home to the Hartsfield-Jackson Atlanta International Airport, the world’s busiest. Nevertheless, the model of building around an airport is something the U.S. is just starting to embrace.


• FLAGS: Maine holds contest for new flag design. The state of Maine is asking people to submit designs for a new state flag, with the winner being put up for a vote in November. The contest is part of an effort to create a more distinctive look for the state flag. Maine is just one of many states that use the state seal on the flag. The state has put some limits around the design, including that it must be on a buff background with a pine tree in the center and a blue, five-pointed North Star in the upper corner. It must also be simple enough for a child to draw from memory. Parts of Maine’s flag have been compared to the more controversial “appeal to heaven” flag adopted by Christian Nationalists. Maine lawmakers have denied that the contest has any relationship to that controversy, saying the vote over a state flag has nothing to do with partisan politics.


• FINANCE: Kansas is making a big run at Kansas City’s pro teams. Kansas is making a serious run at becoming the new home for the reigning Super Bowl champions with legislators approving a plan Tuesday to lure the Chiefs and Major League Baseball’s Kansas City Royals away from Missouri. Bipartisan legislative supermajorities OK’d the measure to authorize state bonds to help finance new stadiums and practice facilities for both teams on the Kansas side of the metropolitan area of 2.3 million residents, which is split by the border with Missouri. The approval capped a two-month push to capitalize on the refusal in April by voters on the Missouri side to continue a local sales tax used to finance the upkeep of the teams’ stadiums. Backers of the plan brushed aside decades of research by economists concluding that government subsidies for professional sports stadiums are not worth the cost.

Picture of the Week

The beaver, Oregon’s official state animal, has for years been classified as a “predator” by the Oregon Fish and Wildlife Commission, and that’s meant that the North American beaver has lived largely unprotected from private landowners who can kill them at will. That will change July 1 when new rules go into effect under the “beaver bill,” which reclassifies them as “furbearers.” With this change, landowners can’t kill a beaver for being a nuisance, or because they’re worried the animal will gnaw through plants or crops. To kill a beaver, the landowner must go through a permitting process, which will require the landowner to undertake non-lethal mitigation strategies first. These include placing fences and barriers around trees, repellent on trees and choosing different types of plants. The bill won’t affect the killing of beavers for their furs during the hunting season, which runs from Nov. 15 to March 15. It also won’t affect beaver trapping on public lands.

Government in Numbers 

150 gigawatts

The amount of power that Texas’ main electric grid operator predicts will be in demand by 2030. If it’s accurate, the state would need to be able to provide nearly double the amount of power within six years. Demand on the power grid hit a record of 85 gigawatts last year, which was the hottest ever recorded in the state. The Electric Reliability Council of Texas now says demand could reach around 150 gigawatts by 2030. For reference, one gigawatt is enough energy to power about 750,000 homes. Two factors led to the higher forecast: A new law allows officials to count companies’ requests for grid connections before they are finalized. And there has been a significant rise in requests from large users such as data centers, hydrogen production facilities and oil and gas companies that are electrifying their operations. Some are requesting several times more power than what the city of Lubbock now uses, according to ERCOT.