No taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. system anywhere in the world has a mark-to-market capital gains taxA capital gains tax is levied on the profit made from selling an asset and is often in addition to corporate income taxes, frequently resulting in double taxation. These taxes create a bias against saving, leading to a lower level of national income by encouraging present consumption over investment. that captures unrealized gains. Some Illinois lawmakers would like to change that—and they plan to ram the proposal through in less than 48 hours.
Under a proposal called the Extremely High Wealth Mark-to-Market Tax Act, Illinois would impose a 4.95 percent tax on the unrealized gains of all assets, tangible and intangible, of billionaires. That includes their stocks and bonds, but also everything else they own, including their ownership and investment stakes in businesses. Essentially, they would have to pay taxes on the value these assets have on paper, even though that value has not been taken as income.
Some taxpayers may find it hard to sympathize with billionaires, but this is an astonishing proposal to try to rush through in less than two days, and one with significant consequences for investment in new and innovative businesses.
Under the proposal, starting in 2026, there would be a tax on a wide range of assets, including stocks and bonds; interests in private equity or hedge funds; ownership interests in S corporations, partnerships, or other closely held or noncorporate businesses; cash, deposits, and options; futures contracts; real property; art and collectibles; and pension funds, among others. The tax falls on such assets wherever they are located (they need not be in Illinois) if they are owned by the taxpayer, their spouse, their minor children, or any estate or trust of which they are the beneficiary.
Notably, the tax also applies to assets held by private foundations (including charities) to which they are a substantial contributor, and to gifts they give, which are taxed as if they were still owned by the taxpayer. It even includes the value of gifts they or their spouse have made over the past five years, even though they no longer have the assets, and any prior transfer clearly would not have been motivated by this proposed tax.
Property is bifurcated into two classes, real and personal. Real property refers to land and improvements—essentially real estate and structures. Personal property is a catch-all class for everything else, though the terminology can be confusing, because “personal” does not tell us anything about the owner of the property. Both businesses and individuals possess personal property. Your television is personal property. So is a construction company’s heavy machinery, and so is a startup founder’s ownership stake in her company.
Personal property can be further divided into two types: tangible and intangible personal property. As the name suggests, tangible property refers to types of (non-real estate) property that can be touched and moved: machinery, equipment, vehicles, household goods, artwork, and the like. Intangible property refers to items of value that are not physical in nature: stocks, bonds, patents, or an ownership stake in a partnership, for instance. Under this proposal, all personal property, both tangible and intangible, would be taxed.
Illinois’ constitution prohibits taxing personal property, so this is being presented as an income tax. But while we might conceptualize unrealized gains as economic income, this is a concept, not a taxable flow. Economists speak of the imputed rent the owner of a house receives from living in (and therefore gaining the benefit from) a house he owns, but no one mistakes this concept for the actual payment of rent. Similarly, the economic income associated with unrealized gains is not contemplated by the Illinois constitution’s authorization of income taxes, which fall on actual cash flows.
So-called mark-to-market taxation of unrealized capital gains would result in a more accurate measure of fluctuations in wealth from year to year, but it is also exceedingly complex, requiring the annual valuation of assets that lack a sales price. It is also potentially quite economically damaging, necessitating the liquidation of some assets (including business investments) to pay taxes on valuation increases that are unmatched by income flows. Taxpayers are obligated to remit actual taxes on paper gains.
It is important to note that mark-to-market taxation does not change the ultimate taxability of capital gains; it changes the timing of that taxation. But time is money—literally. Under the current deferral-based system of capital gains taxation, taxpayers benefit compared to a mark-to-market system where they must pay on gains more quickly. Additional revenue from such a proposal, therefore, is not due to taxing what was once untaxed, but by accelerating payment and benefiting from the time value of money. In one important respect, moreover, taxing capital gains at ordinary income tax rates (as Illinois does) already overtaxes these gains, particularly under a mark-to-market regime, because inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spendin is included in gains.
Things get much worse when the tax is imposed on assets that aren’t publicly traded. Even with publicly traded assets, ownership through trusts and holding companies can complicate valuation, but privately held business assets, artwork, and other items in the portfolios of the wealthiest Illinoisans defy easy valuation. Nationally, publicly traded assets only account for one-fifth of the assets held by the top 1 percent, while private business assets account for more than half.
When an asset is taxed upon realization, the realization event itself produces liquid assets from which the tax can be paid. Even taxing unrealized gains from publicly traded assets is relatively straightforward, since some portion of the shares could be sold in satisfaction of tax liability. (This would, of course, still have consequences for some wealthy investors who are trying to maintain a controlling interest, and conflicting treatment of capital gains at the federal and state levels would create confused incentives.) But with private business assets, the tax can be much more consequential: some portion of the company or its assets may have to be sold to pay taxes on gains that only exist on paper. The owners are asset rich but cash poor.
Imagine a tech founder starting an extremely successful new business and finding herself suddenly worth more than a billion dollars—at least on paper. But her business isn’t profitable yet. (Some of the biggest tech companies in the world took years to be profitable.) She’s exceedingly wealthy according to ledger sheets, but that doesn’t mean she actually has the cash to pay the new tax, at least not without selling a stake in her new business. And of course, there’s no real guarantee that the business’s valuation is accurate, or that it will hold up. How many businesses have seen high initial valuations only to go bankrupt?
Illinois lawmakers propose to address the liquidity issue by allowing each year’s assessment to be paid over 10 years, albeit with a 7.5 percent penalty. This doesn’t even come close to solving the problems created by the tax.
Closely held business assets and many other personal, non-traded assets are, of course, notoriously hard to value. Determining their fair market value for tax purposes is difficult, contentious, likely to produce high error rates . . . and is mandated, as of tax year 2026, in legislation of a few pages that will only get two days’ consideration. (The bill was introduced the evening of Tuesday, October 28th, for a veto session that ends Thursday, October 30th.)
Such a highly complex, costly tax will undoubtedly change behavior, with the Joint Committee on Taxation noting that capital gains are particularly sensitive to taxation. And one behavior we’d expect to see in Illinois at a much greater rate than if such a tax were adopted by the federal government: moving out. If unrealized capital gains are to be taxed year after year, that could easily drive some of Illinois’ wealthiest taxpayers out of state—depriving the state of their existing income tax payments (including on capital gains), along with other taxes they remit, to say nothing of their impact on the state’s economy more broadly.
No tax system anywhere in the world has ever used mark-to-market taxation. It is astonishing that Illinois lawmakers are taking up such a proposal on the clock, trying to rush it through before the current veto session ends on October 30th.
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