Wealth Taxes and Unrealized Gains: The Constitutional Battle After Moore

In October 2025, the Service Employees International Union filed the "2026 Billionaire Tax Act," a ballot initiative that would impose a one-time 5% tax on the net worth of California residents with assets exceeding $1 billion. The proposal, which targets approximately 200 billionaires holding nearly $2 trillion in collective wealth, aims to generate around $100 billion in revenue—90% for healthcare services and 10% for education and food assistance programs. The initiative seeks to offset anticipated federal cuts to Medicaid and other social programs, with proponents arguing that without this tax, millions of Californians could lose healthcare access.

The proposal is audacious, but it is not unique. Similar wealth tax initiatives have been considered in New York, Washington, and Massachusetts, though none have yet succeeded. At the federal level, proposals for wealth taxes and taxes on unrealized gains have circulated for years, championed by figures like Senator Elizabeth Warren and Senator Bernie Sanders. What unites these proposals is a fundamental question: Can the government tax wealth or unrealized gains, or must income be "realized" before it can be taxed?

The answer to that question lies, in part, in the Supreme Court's decision in Moore v. United States, decided in June 2024. The case, which upheld the Mandatory Repatriation Tax from the Tax Cuts and Jobs Act of 2017, provides crucial—but incomplete—guidance on the constitutional limits of taxing unrealized income. The justices' opinions reveal deep divisions about the scope of Congress's taxing power and the meaning of "income" under the Sixteenth Amendment. Justice Ketanji Brown Jackson's concurrence, in particular, offers a roadmap for how future wealth taxes or unrealized gains taxes might be constitutionally justified.

The Constitutional Framework

The Constitution grants Congress broad power to tax, but with important limitations. Article I, Section 8 requires that taxes be "uniform throughout the United States," while Section 9 requires that "direct taxes" be apportioned among the states based on population. The Sixteenth Amendment, ratified in 1913, clarified that Congress could tax "incomes, from whatever source derived, without apportionment."

The question of what constitutes "income" has been central to tax law for over a century. The traditional understanding, dating back to cases like Eisner v. Macomber (1920), held that income must be "realized" before it can be taxed—meaning the taxpayer must receive something of value, typically through a sale or exchange. This realization requirement was seen as a constitutional limitation on Congress's power to tax.

But the realization requirement has always been more flexible in practice than in theory. The Supreme Court has upheld taxes on undistributed corporate earnings, partnership income allocated to partners, and other forms of income that might not be "realized" in the traditional sense. The question is whether this flexibility extends to taxing unrealized gains or wealth itself.

Moore v. United States: The Case

Moore v. United States arose from the Tax Cuts and Jobs Act of 2017, which included a "Mandatory Repatriation Tax" (MRT) under Section 965. The MRT imposed a one-time tax on U.S. shareholders of controlled foreign corporations, taxing them on their share of the corporations' accumulated earnings and profits, even if those earnings had not been distributed to the shareholders.

Charles and Kathleen Moore, who owned 11% of a controlled foreign corporation, were taxed on approximately $132,000 of undistributed earnings. They challenged the tax, arguing that it violated the Sixteenth Amendment because they had not "realized" any income—they had not received any distributions from the corporation.

The case made its way to the Supreme Court, where it was decided on June 20, 2024, by a 7-2 vote. The Court upheld the MRT, but the justices' reasoning revealed significant differences about the scope of Congress's taxing power and the meaning of "income."

The Majority Opinion: Justice Kavanaugh

Justice Brett Kavanaugh, writing for the majority, took a narrow approach. He emphasized that the MRT fell within Congress's long-recognized power to tax shareholders on the undistributed income of business entities. The Court had previously upheld similar taxes, and the MRT was consistent with that precedent.

Kavanaugh carefully limited the holding to the specific facts of the case. He did not address broader questions about wealth taxes or taxes on unrealized gains more generally. Instead, he focused on the MRT as a tax on income that had been earned by a controlled entity, even if not yet distributed to shareholders.

The majority's narrow approach left many questions unanswered. Could Congress tax unrealized gains on stock? Could it tax wealth itself? The opinion did not say, leaving those questions for future cases.

The Concurrence: Justice Jackson

Justice Ketanji Brown Jackson wrote a separate concurrence that went far beyond the majority's narrow holding. Her opinion provides a detailed analysis of the constitutional issues surrounding unrealized gains taxes and offers a roadmap for how such taxes might be justified.

Jackson began by emphasizing Congress's "plenary power" over taxation. The Constitution, she noted, supplies only two relevant conditions: direct taxes must be apportioned among the states based on population, and all other taxes must be uniform throughout the United States. During the century after the nation's founding, the Court repeatedly recognized that, in matters of tax policy, Congress's view was controlling.

She then turned to the history of the Sixteenth Amendment, which was adopted in response to Pollock v. Farmers' Loan & Trust Co. (1895). In that case, the Court invalidated a federal income tax, holding that a tax on income derived from property was a direct tax requiring apportionment. Pollock "provoked immediate outcry," Jackson noted, and President Taft, later Chief Justice, said that "Nothing has ever injured the prestige of the Supreme Court more." The Sixteenth Amendment restored to Congress the power to tax "incomes, from whatever source derived, without apportionment."

Jackson addressed the "realization requirement" head-on. She noted that this requirement appears nowhere in the text of the Sixteenth Amendment. Instead, it comes from Eisner v. Macomber (1920), which struck down a tax on stock dividends. Like Pollock, Macomber was "promptly and sharply criticised," and over the two decades that followed, the Court "limited" Macomber's realization requirement "to the kind of dividend there dealt with," while also "undermining...the original theoretical bases of the decision" in other contexts.

Jackson argued that there is no constitutional requirement that a taxpayer "be able to sever...the gain from his original capital" in order to be taxed on it. Realization, she noted, is "founded on administrative convenience," not constitutional mandate. Both before and after the Sixteenth Amendment was adopted, the term "income" was widely recognized as flexible enough to include both realized and unrealized gains.

In the lower courts, Jackson observed, Macomber's definition of income has long been deemed "outmoded, if not overruled." Any litigant seeking to sustain her case on the basis of Macomber would have to "bring back from the dead its Court-created limit on Congress's power."

Jackson also addressed an alternative theory: even if a tax violated the Sixteenth Amendment, it could still be valid as an excise tax. The Constitution does not exhaustively define direct taxes, but it does expressly exclude certain taxes—"Duties, Imposts and Excises"—from apportionment. The Court has interpreted those categories broadly, upholding uniform taxes as excises even when predicated on something that, if taxed on its own, might require apportionment. In the Moore case, the government argued that the MRT could be understood as an excise tax on the privilege of doing business through a controlled foreign corporation.

Jackson concluded with a call for judicial restraint. "I have no doubt that future Congresses will pass, and future Presidents will sign, taxes that outrage one group or another," she wrote. However, Pollock teaches us that the Court's role in such disputes should be limited. "The remedy for such abuses is to be found at the ballot-box, and in a wholesome public opinion which the representatives of the people will not long, if at all, disregard, and not in the disregard by the judiciary of powers that have been committed to another branch of the government."

Jackson's concurrence is significant because it explicitly rejects the realization requirement as a constitutional mandate and provides a framework for how future wealth taxes or unrealized gains taxes might be justified. Her opinion suggests that such taxes could be constitutional, either as income taxes under the Sixteenth Amendment or as excise taxes under Congress's general taxing power.

The Dissent: Justices Thomas and Gorsuch

Justice Clarence Thomas, joined by Justice Neil Gorsuch, wrote a comprehensive dissent that stands in stark contrast to Jackson's concurrence. Where Jackson rejected the realization requirement as a constitutional mandate, Thomas insisted that it is essential to the meaning of "income" under the Sixteenth Amendment.

Thomas began by emphasizing that the Moores "paid $14,729 in taxes on an investment that never yielded them a penny." They challenged the MRT as unconstitutional, arguing that "a tax on unrealized investment gains is not a tax on 'incomes' within the meaning of the Sixteenth Amendment." Thomas concluded that the "Moores are correct."

For Thomas, the text and history of the Sixteenth Amendment make clear that it requires a distinction between "income" and the "source" from which that income is "derived." And, he argued, "the only way to draw such a distinction is with a realization requirement." This requirement comes from Eisner v. Macomber (1920), which explained that "the characteristic and distinguishing attribute of income," as the term is used in the Sixteenth Amendment, is that it is "received or drawn by the recipient (the taxpayer) for his separate use, benefit and disposal." Because the Moores never actually received any of their investment gains, those unrealized gains could not be taxed as "income" under the Sixteenth Amendment.

Thomas's dissent provides a detailed historical analysis of the constitutional framework for taxation. He explained that the Constitution's original taxing provisions divided taxes into two classes: direct and indirect taxes. Direct taxes must be apportioned among the states based on population, while indirect taxes must be uniform throughout the United States. This division was "a critical aspect of the balance between state and federal power in the original design of the Constitution."

The dispute over direct taxes came to a head in Pollock v. Farmers' Loan & Trust Co. (1895), where the Court held that many income taxes were direct taxes subject to the apportionment requirement. The Court concluded that income could not be distinguished from its source for purposes of classifying an income tax as direct or indirect. The Sixteenth Amendment was ratified to overrule that holding from Pollock.

Thomas argued that the Sixteenth Amendment "abolished Pollock's rule that an income tax must be classified as direct or indirect based on whether a tax on the source of that income would be direct or indirect." The Amendment therefore "created a constitutional distinction between income and its source." And, crucially, "because Sixteenth Amendment 'income' must be distinguished from its source, the Amendment includes a realization requirement."

Thomas explained that the word "income" in the Sixteenth Amendment must be interpreted in light of the Amendment's distinction between income and source. Without an understanding of "income" that distinguishes it from "source," the Sixteenth Amendment would undermine the restriction imposed by the Direct Tax Clause. The Government's definition of income as "all economic gains" would allow taxes on real and personal property without apportionment, which would violate the original constitutional framework.

The text of the Sixteenth Amendment points to the concept of realization, Thomas argued. The Amendment is clear that the word "income" refers to something that is "derived." Dictionaries at the time of ratification defined "derive" as "[t]o receive, as from a source or origin" and "to draw." That sense of "derived" maps onto Macomber's realization-focused definition of "income" as being "received or drawn by the recipient (the taxpayer) for his separate use."

Thomas also criticized the majority for avoiding the question presented. The Court had granted certiorari to answer "[w]hether the Sixteenth Amendment authorizes Congress to tax unrealized sums without apportionment among the states." But the majority, Thomas argued, "upholds the MRT only by ignoring the question presented." Instead, it answered a different question: "whether Congress may attribute an entity's realized and undistributed income to the entity's shareholders or partners."

The majority's "attribution" doctrine, Thomas argued, is "an unsupported invention." The cases cited by the majority—Burk-Waggoner Oil Assn. v. Hopkins, Burnet v. Leininger, Heiner v. Mellon, and Helvering v. National Grocery Co.—do not support the proposition that the Sixteenth Amendment empowers Congress to freely attribute income to any taxpayer it reasonably chooses. At most, they demonstrate that Congress may attribute income to the entity or individual who actually controlled it when necessary to defeat attempts to evade tax liability.

Thomas also rejected the majority's argument that the MRT is indistinguishable from other longstanding taxes, such as taxes on partnerships, S corporations, and closely held foreign corporations under subpart F. The MRT, he argued, "differs from other provisions of Subpart F" because it does not focus on "the corporation's receipt of investment earnings while subject to the shareholders' control." The MRT "tags a shareholder with taxable 'income' even if" he purchased shares "long after the corporation earned the sums being taxed," and it imposes no liability on taxpayers who owned shares for years of retained earnings but sold them before the MRT's trigger date.

Finally, Thomas criticized the majority for reasoning from fiscal consequences. The majority had fretted that invalidating the MRT would "deprive the U. S. Government and the American people of trillions in lost tax revenue" and "require Congress to either drastically cut critical national programs or significantly increase [other] taxes." But Thomas responded: "If Congress invites calamity by building the tax base on constitutional quicksand, '[t]he judicial Power' afforded to this Court does not include the power to fashion an emergency escape."

Thomas concluded: "The Court today upholds the MRT, but not because it endorses the Ninth Circuit's erroneous view that 'realization of income is not a constitutional requirement.'" The majority acknowledges that the Sixteenth Amendment draws a distinction between income and its source, and it does not dispute that realization is what distinguishes income from property. "Those premises are sufficient to establish that realization is a constitutional requirement. Sixteenth Amendment 'income' is only realized income. We should not have hesitated to say so in this case."

Thomas's dissent creates a significant barrier to wealth taxes or taxes on unrealized gains. If income must be realized before it can be taxed, then taxing unrealized gains or wealth itself would be unconstitutional. His position stands in direct opposition to Jackson's concurrence, creating two clear poles in the debate over the scope of Congress's taxing power.

Other State Wealth Tax Proposals

California's proposal is not the first attempt to implement a wealth tax at the state level. Similar proposals have been considered in New York, Washington, and Massachusetts, though none have yet succeeded. These proposals face both political and legal challenges.

The political challenges are significant. Wealth taxes are controversial, and opponents argue that they could drive wealthy individuals out of states, potentially reducing overall tax revenues. Governor Gavin Newsom of California, for example, has previously resisted tax hikes on the wealthy, despite supporting healthcare expansion.

The legal challenges are equally significant. State wealth taxes raise questions about due process, the Commerce Clause, and state constitutional limitations. States cannot tax wealth located outside their borders without running afoul of due process requirements, and they must navigate the complex rules governing interstate taxation.

California's proposal attempts to address some of these concerns by excluding real estate, pensions, and retirement accounts from the tax base. It also allows taxpayers to spread payments over five years, which may help address liquidity concerns. But these provisions do not eliminate the fundamental legal questions about whether a state can tax wealth at all.

Federal Wealth Tax Proposals

At the federal level, proposals for wealth taxes have been circulating for years. Senator Elizabeth Warren proposed a 2% annual tax on net worth over $50 million, with an additional 1% on wealth over $1 billion. Senator Bernie Sanders proposed a similar tax, with rates ranging from 1% to 8% depending on wealth levels.

These proposals face constitutional questions similar to those raised by state wealth taxes. The primary question is whether a wealth tax would be a "direct tax" requiring apportionment, or whether it could be justified as an income tax under the Sixteenth Amendment or as an excise tax under Congress's general taxing power.

The Moore decision provides some guidance, but it does not definitively answer these questions. The majority's narrow holding suggests that the Court is reluctant to expand Congress's taxing power beyond traditional boundaries, but Jackson's concurrence suggests that at least one justice would be open to broader interpretations.

The Constitutional Analysis

The constitutional questions surrounding wealth taxes and unrealized gains taxes are complex and multifaceted. At the federal level, the primary questions are:

1. Is a wealth tax a "direct tax" requiring apportionment? The Constitution requires that direct taxes be apportioned among the states based on population, which would make a wealth tax practically impossible to implement. The Supreme Court has historically interpreted "direct taxes" narrowly, limiting them to taxes on land and head taxes. But a wealth tax might fall within this category, depending on how it is structured.

2. Can unrealized gains be taxed as "income" under the Sixteenth Amendment? Jackson's concurrence suggests that the answer is yes—that "income" is flexible enough to include unrealized gains, and that there is no constitutional requirement for realization. But the majority opinion in Moore did not address this question directly, leaving it open for future cases.

3. Can a wealth tax be justified as an excise tax? Jackson's concurrence suggests that even if a tax cannot be justified as an income tax, it might still be valid as an excise tax on the privilege of holding wealth. This theory has not been tested, but it provides a potential constitutional basis for wealth taxes.

At the state level, the questions are different but equally complex:

1. Due Process concerns: States can only tax wealth that has a sufficient connection to the state. This creates significant challenges for states trying to tax the wealth of residents who may hold assets in multiple states or countries.

2. Commerce Clause issues: State wealth taxes must not unduly burden interstate commerce or discriminate against out-of-state interests. This limits states' ability to tax wealth located outside their borders.

3. State constitutional limitations: Many states have constitutional provisions that limit taxation, which may restrict the ability to implement wealth taxes even if they would otherwise be constitutional.

The California Proposal in Context

California's 2026 Billionaire Tax Act, if it qualifies for the ballot and is approved by voters, will likely face immediate legal challenges. Opponents have already filed five constitutional amendment initiatives designed to counter the wealth tax, including proposals to raise the voter approval threshold and establish new residency rules.

The proposal's exclusion of real estate, pensions, and retirement accounts is significant. By excluding real estate, the proposal avoids some of the most difficult valuation and jurisdictional questions. But it also creates potential loopholes, as wealthy individuals might shift assets into excluded categories to avoid the tax.

The five-year payment option addresses liquidity concerns, but it also creates administrative complexity. Taxpayers who choose to spread payments will face additional costs, and the state will need to manage installment payment plans over an extended period.

The proposal's focus on billionaires—individuals with net worth over $1 billion—is politically strategic. By targeting only the wealthiest individuals, proponents hope to minimize opposition and maximize public support. But it also raises questions about fairness and whether the tax base is too narrow to be sustainable.

The Future of Wealth Taxation

The Moore decision provides important guidance, but it does not resolve all the questions surrounding wealth taxes and unrealized gains taxes. The majority's narrow holding suggests that the Court is cautious about expanding Congress's taxing power, but Jackson's concurrence suggests that at least one justice would support broader interpretations.

The future of wealth taxation will likely depend on several factors:

1. Political will: Wealth taxes are politically controversial, and their success will depend on public support and political leadership. California's proposal, if successful, could provide a model for other states.

2. Legal challenges: Any wealth tax, whether state or federal, will face immediate legal challenges. The Moore decision provides some guidance, but many questions remain unanswered.

3. Administrative feasibility: Wealth taxes are administratively complex, requiring accurate valuation of diverse assets and effective enforcement mechanisms. These challenges may prove more significant than the constitutional questions.

4. Economic impact: The economic effects of wealth taxes are uncertain. Proponents argue that they will generate significant revenue and reduce inequality, while opponents argue that they will drive capital flight and reduce investment.

Conclusion

The debate over wealth taxes and unrealized gains taxes is just beginning. California's proposed billionaire tax, if it succeeds, will provide an important test case for the constitutionality and feasibility of state-level wealth taxation. The Supreme Court's decision in Moore v. United States provides crucial guidance, but it leaves many questions unanswered.

The Moore case reveals two fundamentally different visions of Congress's taxing power, represented by Justice Jackson's concurrence and Justice Thomas's dissent. These two poles define the constitutional debate over wealth taxes and unrealized gains taxes.

On one side, Justice Jackson argues that the Sixteenth Amendment does not require realization. She explicitly rejects Macomber's realization requirement as a constitutional mandate, arguing that it was "founded on administrative convenience," not constitutional law. Her framework suggests that wealth taxes or taxes on unrealized gains could be constitutional, either as income taxes under the Sixteenth Amendment or as excise taxes under Congress's general taxing power. Her call for judicial restraint suggests that she would allow Congress and state legislatures to experiment with new forms of taxation, with the remedy for abuses found "at the ballot-box," not in the courts.

On the other side, Justice Thomas insists that realization is essential to the meaning of "income" under the Sixteenth Amendment. He argues that the Amendment requires a distinction between income and its source, and that realization is "the only way to draw such a distinction." His position would create a significant barrier to wealth taxes or taxes on unrealized gains. If income must be realized before it can be taxed, then taxing unrealized gains or wealth itself would be unconstitutional.

The majority's narrow holding in Moore suggests that the Court is cautious about expanding taxing power beyond traditional boundaries. Justice Kavanaugh carefully limited the holding to the specific facts of the case, avoiding broader questions about wealth taxes or taxes on unrealized gains. The Court's refusal to address the realization question directly leaves the constitutional status of wealth taxes uncertain.

As California's proposal moves toward the ballot, and as other states consider similar measures, these constitutional questions will become increasingly important. The Moore decision provides a foundation, but it is only the beginning of what promises to be a long and complex legal battle over the future of wealth taxation in America. The debate between Jackson's expansive view and Thomas's restrictive view will likely shape that battle for years to come.