California lawmakers are pushing legislation that would impose a new tax on the state’s wealthiest residents — even if they’ve already moved to another part of the country.
Assemblyman Alex Lee, a progressive Democrat, last week presented a bill in California State Legislature that would impose an additional 1.5% annual tax on those with a “worldwide net worth” of more than $1 billion, starting as early as January 2024.
As early as 2026, the threshold for being taxed would drop: those with a worldwide 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%.
Worldwide wealth extends beyond annual income to include various holdings such as agricultural assets, art and other collectibles, as well as stocks and hedge fund interests.
The legislation is a modified version of a wealth tax passed in the 2020 California Assembly that the Democrat-led state Senate declined to pass.
The current version, just introduced, includes measures to allow California to impose property taxes on residents even years after they left the state and moved elsewhere.
Exit taxes are not new in California. But this bill also contains provisions to create contractual claims attached to the assets of a wealthy taxpayer who does not have the cash to pay their annual wealth tax bill because most of their assets are not easily converted to cash. This requirement would require the taxpayer to file annual returns with the California Franchise Tax Board and ultimately pay the property taxes owed, even if they have moved to another state.
California was one of several 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 around the same basic idea: the rich must pay more.
Lee’s office did not respond to a request for comment for this story. However, he has made public statements repeating the message that wealthier residents should pay higher taxes.
“The working class has shouldered the tax burden for too long,” Lee wrote in a tweet. “The ultra-rich pay little to nothing by amassing their wealth through assets. Time to end it.”
According to Lee, the tax would affect 0.1% of California households and generate an additional $21.6 billion in state revenue that would go into the state’s general fund. California has among the highest taxes of any state in the country.
Proponents argue that the money could increase funding for schools, housing and other social programs. But perhaps more importantly, Lee hopes it can help solve California’s massive $22.5 billion budget deficit.
“This is how we can continue to solve our budget problems,” he told the Los Angeles Times. “Basically, we could close the entire gap.”
However, experts counter that the bill will have the exact opposite effect through high administrative costs and by causing an exodus of people to flee the state.
“It brings significant administrative challenges in terms of asset and liability valuation, high and distorting effective interest rates, among other issues that make it an inefficient source of revenue,” Gordon Gray, director of fiscal policy at the American Action Forum, told Fox New Digital .
Others echoed this point, also arguing that a new wealth tax would likely drive many wealthy residents out of California.
“The proposed California wealth tax would be economically devastating, challenging to administer and would drive many wealthy residents — and all of their current tax payments — out of the state,” Jared Walczak, vice president of state projects at the Tax Foundation, told Fox News Digital. “The bill allocates as much as $660 million a year to administrative costs alone, more than $40,000 per potential taxpayer, giving an idea of how difficult such a tax would be to administer.”
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. He found that the 10 highest-tax states lost nearly 1 in 100 residents in net immigration between July 2021 and July 2022, while the 10 lowest-tax states gained nearly 1 in 100.
California lawmakers pushing the wealth tax believe they can “sidestep” the problem of residents leaving “by trying to tax people even after they’ve left the state,” said Patrick Gleason, vice president of state affairs at Americans for Tax Reform. However, he, Gray, and Walczak all questioned the legality of such an approach or labeled it outright unconstitutional.
Previous studies have shown that the top 1% of taxpayers pay approx 50% of state income taxes in New York, California and elsewhere, raising the question of how damaging a mass exodus of wealthy residents might be to tax revenues.
Walczak noted that a wealth tax would be particularly problematic for California, and joked that the people most excited about such a law should be people in Texas, where some high-profile Californians have moved in recent years.
“A wealth tax could be particularly devastating in California, home to so many tech startups, because the owners of promising companies could be taxed on hundreds of millions of dollars in estimated business value that never actually materializes,” Walczak said. “Very few taxpayers would waive property taxes, but many taxpayers would pay the price. The only people who should really love a California property tax are those who work in the Texas Office of Economic Development.”
But some proponents of wealth taxes argue that they are necessary to combat economic inequality.
Maryland Democratic delegate Jheanelle K. Wilkins, for example, has proposed a bill so that families would owe tax on inheritances over $1 million instead of $5 million, as is the case today. She said such ideas will now gain more support after the COVID-19 pandemic exposed inequality between rich and poor.
“That’s a lot of funding that we’re leaving on the table,” she told the Washington Post.
Other proponents say that wealth taxes are small and that the rich can afford them. But experts note that because the rates are on net worth, not income, they have too much of an impact.
Walczak illustrated the point in a recent blog post, as an example, uses a $50 million investment, held for 10 years, earning a nominal annual return of 10% in an environment of 3% annual inflation. Without a wealth tax, this investment would yield $46.5 million in investment returns, in current dollars, after 10 years. However, with a 1% wealth tax, that would yield $37.3 million, wiping out nearly 20% of the gain.
Wealth taxes “cut deeply into investment returns to the detriment of the broader economy,” Walczak wrote. “Average taxpayers might not care if the ultra-wealthy have lower net worths. But they certainly won’t care if innovation slows and investment falls.”