California Democrats consider wealth tax – including for people who have left the state

California Democrats consider wealth tax – including for people who have left the state

California lawmakers are proposing legislation that would impose a new tax on the state’s wealthiest residents, even if they have already moved to another part of the country.

Congressman Alex Lee, a progressive Democrat, last week tabled a bill in the California State Legislature that would impose an additional 1.5% annual tax on those whose “global net worth” exceeds $1 billion, effective January 2024.

From 2026, the tax threshold would drop: those with a global net worth of more than $50 million would be hit with an annual wealth tax of 1%, while billionaires would still be taxed at 1.5%.

Global wealth extends beyond annual income to include various assets such as agricultural assets, arts and other collectibles, stocks and hedge fund interests.



California Governor Gavin Newsom
(Justin Sullivan/Getty Images/File)

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The legislation is a modified version of a wealth tax approved in the California Assembly in 2020, which the Democratic-led state Senate declined to pass.

The current version just introduced includes measures allowing California to impose wealth taxes on residents even years after they leave the state and move elsewhere.



Exit taxes are nothing new in California. But this bill also includes provisions to create contractual claims tied to the assets of a wealthy taxpayer who does not have the cash to pay his annual wealth tax bill because most of his assets are not not easily transformed into cash. This claim would require the taxpayer to file annual returns with the Franchise Tax Board of California and possibly pay any wealth taxes owed, even if they moved to another state.

California was one of many blue states last week to unveil bills to impose new wealth taxes. The other states were Connecticut, Hawaii, Illinois, Maryland, Minnesota, New York and Washington. Each state’s proposal contained a different tax approach, but they all centered on the same basic idea: the wealthy should pay more.

Lee’s office did not respond to a request for comment for this story. However, he has made public statements echoing the message that wealthier residents should pay higher taxes.

“The working class has carried the tax burden for too long,” Lee said. wrote in a tweet. “The ultra-rich pay little or nothing by hoarding their wealth through assets. It’s time to end it.”

According to Lee, the tax would hit 0.1% of California households and generate an additional $21.6 billion in revenue for the state, which would go to the state’s general fund. California has among the highest taxes from any state in the country.

Proponents argue the money could boost funding for schools, housing and other social programs. Perhaps more importantly, however, Lee hopes it could help solve California’s massive $22.5 billion budget deficit.

In this Jan. 24, 2013, photo, a customer looks at a copy of TurboTax for sale at Costco in Mountain View, Calif.

In this Jan. 24, 2013, photo, a customer looks at a copy of TurboTax for sale at Costco in Mountain View, Calif.
(AP Photo/Paul Sakuma)

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“This is how we can continue to work through our budget issues,” he told the Los Angeles Times. “Basically, we could plug the whole hole.”

However, experts counter that the bill will have exactly the opposite effect due to high administrative costs and causing an exodus of people to flee the state.

“This poses significant administrative challenges in terms of asset and liability valuation, high and distorted effective rates, among other issues that make it an inefficient source of revenue,” said Gordon Gray, director of fiscal policy. at the American Action Forum, at Fox New Digital.

Others echoed that point, also saying a new wealth tax would likely drive many wealthy residents out of California.

“California’s proposed wealth tax would be economically destructive, difficult to administer, and would drive many wealthy residents – and all of their current tax payments – out of state,” said Jared Walczak, vice president of projects. of State at the Tax Foundation, at TOU Digital. “The bill sets aside up to $660 million a year just for administrative costs, or more than $40,000 per potential taxpayer, which gives an idea of ​​how difficult it is to administer such a tax.”

People are already moving from high-tax states to low-tax states, according to a recent analysis by James Doti, President Emeritus and Professor of Economics at Chapman University. It found that the 10 highest-taxed states lost nearly 1 in 100 residents in net inward migration between July 2021 and July 2022, while the 10 lowest-taxed states gained nearly 1 in 100.

California lawmakers pushing the wealth tax think they can “get around” the problem of departing residents “by trying to tax people even after they leave the state,” said Patrick Gleason, vice-president. chairman of state affairs at Americans for Tax Reform. However, he, Gray, and Walczak all questioned the legality of such an approach or called it unconstitutional.

Some experts say a new wealth tax would likely drive many wealthy residents out of California.

Some experts say a new wealth tax would likely drive many wealthy residents out of California.
(Ian Jopson/File)

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Previous studies have shown that the top 1% of taxpayers pay about 50% state income taxes in New York, California and elsewhere, raising the question of how damaging a mass exodus of wealthy residents could be to tax revenue.

Walczak noted that a wealth tax would be particularly problematic for California, joking that the people most excited about such a law would have to be residents of Texas, where some high-profile Californians have moved in recent years.

“A wealth tax could be particularly destructive in California, home to so many tech startups, because promising business owners could be taxed on hundreds of millions of dollars of estimated business value that never materializes,” he said. Walczak. “Very few taxpayers would pay wealth taxes, but many taxpayers would pay the price. The only people who should really like a California wealth tax are those who work in the Texas office of economic development.”

However, some proponents of wealth taxes say they are necessary to tackle economic inequality.

Maryland Democratic Rep. Jheanelle K. Wilkins, for example, has proposed a bill to make families liable for estate taxes of more than $1 million instead of $5 million, as it does. is the case today. She said such ideas would now gain more support after the COVID-19 pandemic exposed the inequalities between rich and poor.

“That’s a lot of money we’re leaving on the table,” she told The Washington Post.

Other proponents say wealth taxes are low and the wealthy can pay them. But experts note that because the rates are based on net worth, not income, they have an outsized effect.

TOU

Walczak illustrated this point in a recent blog Publish, using as an example a $50 million investment, held for 10 years and generating a nominal annual rate of return of 10% in a 3% annual inflation environment. Without wealth taxes, this investment would yield $46.5 million in return on investment, in current dollars, after 10 years. With a 1% wealth tax, however, that would bring in $37.3 million, wiping out nearly 20% of the winnings.

Wealth taxes “deeply cut investment returns, to the detriment of the broader economy,” Walczak wrote. “Average taxpayers may not care if the ultra-rich have lower net worth. But they certainly will if innovation slows and investment declines.”