California Democrats consider wealth tax, even for people who moved out of state

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 introduced a bill in the California State Legislature that would impose an additional 1.5% annual tax on those with a “world net worth” greater than $1 billion, as of January 2024.

As early as 2026, the threshold for paying taxes would drop: those with a global net worth above $50 million would be hit with a 1% annual tax on wealth, while billionaires would still pay a 1.5% tax.

World wealth extends beyond annual income to include diverse holdings, such as agricultural assets, art and other collectibles, and hedge fund stocks and interests.

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

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The legislation is a modified version of an estate tax passed in the California Assembly in 2020, which the Democratic-led state Senate refused to pass.

The current version just filed includes measures to allow California to impose estate taxes on residents even years after they have left the state and moved elsewhere.

Exit taxes are not new to California. But this bill also includes provisions to create contractual claims tied to the assets of a wealthy taxpayer who doesn’t have the cash to pay his annual estate tax bill because most of his assets don’t easily convert to cash. This claim would require the taxpayer to file annual returns with the California Franchise Tax Board and eventually pay any estate taxes owed, even if they moved to another state.

California was one of several blue states that introduced bills last week to impose new estate taxes. The other states were Connecticut, Hawaii, Illinois, Maryland, Minnesota, New York, and Washington. Each state’s proposal contained a different approach to taxation, but all focused on the same basic idea: the rich 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 borne the tax burden for too long,” Lee wrote in a tweet. “The ultra-rich are paying little or nothing by accumulating their wealth through assets. It’s time to end that.”

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

Proponents argue that the money could boost funding for schools, housing and other social programs. Perhaps most importantly, though, Lee hopes she can help address 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, California.

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

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

However, experts counter that the bill will have the exact opposite effect through high administrative costs and cause an exodus of people fleeing the state.

“It brings significant administrative challenges with respect to the valuation of assets and liabilities, high and distorted effective rates, among other issues that make it an inefficient source of revenue,” Gordon Gray, director of tax policy at American Action, told Fox New Digital. Forum.

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

“The proposed California estate tax would be economically destructive, difficult to administer and would drive many wealthy residents, and all of their current tax payments, out of state,” Jared Walczak, vice president of state projects for the Tax Foundation, told Fox. NewsDigital. “The bill reserves up to $660 million per year just for administrative costs, more than $40,000 per potential taxpayer, which gives you an idea of ​​how difficult it would be to administer such a tax.”

People are already moving from high-tax 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 internal migration 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 “fix” the problem of residents leaving “trying to tax people even after they leave the state,” said Patrick Gleason, vice president of state affairs for California. Americans for Tax Reform. However, he, Gray and Walczak questioned the legality of such an approach or called it unconstitutional.

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

Some experts argue that 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% of 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 especially problematic for California, joking that the people most excited about such a law should be people in Texas, where some high-profile Californians have relocated in recent years.

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

However, some proponents of estate taxes argue that they are necessary to combat economic inequality.

Maryland Democratic delegate Jheanelle K. Wilkins, for example, has proposed a bill to make families owe estate taxes of more than $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 money we’re leaving on the table,” he told the Washington Post.

Other supporters say estate taxes are small and the rich can afford them. But experts point out that because the rates are based on net worth, not income, they have an outsized effect.

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Walczak illustrated the point in a recent blog post, using as an example an investment of $50 million, held for 10 years and earning a nominal 10% annual rate of return in an environment of 3% annual inflation. Without an estate tax, that investment would produce $46.5 million in investment returns, in current dollars, after 10 years. However, with a 1% wealth tax, it would generate $37.3 million, wiping out nearly 20% of the profit.

Estate taxes “sharply cut into investment returns, to the detriment of the broader economy,” Walczak wrote. “Average taxpayers may not care if the ultra-rich have lower net worths. But they certainly will if innovation slows and investment dwindles.”

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