Even if they have already left the state and moved elsewhere in the country, California politicians are pushing legislation to levy a new tax on the state’s wealthiest inhabitants.
Progressive Democrat Assemblyman Alex Lee last week filed a bill in the California Legislature that would impose an additional yearly 1.5% tax starting as early as January 2024 on anybody with a “global net worth” over $1 billion.
The wealth threshold would be lowered starting in 2026, with billionaires continuing to pay a 1.5% wealth tax, while those with a global net worth over $50 million would be subject to a 1% yearly wealth tax.
Global wealth includes various possessions like farmland, artwork and other collectibles, securities, hedge fund interests, and annual income. The bill is a modified version of a wealth tax that the California Assembly adopted in 2020 but that the state Senate, which Democrats control, chose not to pass.
The recently proposed version includes provisions enabling California to tax residents’ wealth even after migrating out of the state and into another country.
In California, exit taxes are nothing new. However, this plan also contains provisions that would allow for the creation of contractual claims based on the assets of a wealthy taxpayer with the resources to pay their annual wealth tax payment because most of their support can’t be quickly converted into cash. Even if the taxpayer has migrated to another state, this claim would still require them to file annual returns with the California Franchise Tax Board and finally pay the wealth taxes due.
Last week, many blue states, including California, unveiled legislation to enact additional wealth taxes. Connecticut, Hawaii, Illinois, Maryland, Minnesota, New York, and Washington were the other states. Although the tax strategies in each state’s proposal varied, they were all based on the same fundamental principle: The wealthy must pay more.
Lee’s office did not answer an inquiry for comment on this story. He has, however, made public pronouncements that support the idea that residents with incredible wealth should pay higher taxes.
In a tweet, Lee stated that “the working class has borne the tax burden for far too long.” “The ultra-rich are storing their riches through assets, paying little to nothing in taxes. Stop doing that now.
The working class has shouldered the tax burden for too long. In CA, we’ve introduced #ACA3 + #AB259 to tax the ultra rich & invest in all Californians
The ultra rich are paying little to nothing by hoarding their wealth through assets. Time to end that https://t.co/DadERQTgiK
— Alex Lee 李天明 (@alex_lee) January 20, 2023
Lee estimates that the tax would affect 0.1% of Californian families and bring in an additional $21.6 billion for the state’s general fund. California has some of the highest taxes in the nation.
Supporters claim that the funds might increase support for social initiatives like housing, education, and healthcare. Lee, though, is more concerned that it would aid in reducing California’s enormous $22.5 billion budget deficit. He told the Los Angeles Times that we could continue to address our budgetary challenges in this manner. In essence, we could close up the entire opening.
Experts disagree, arguing that the bill will have the opposite impact due to high administrative costs and a population flight from the state. According to Gordon Gray, director of fiscal policy at the American Action Forum, “it introduces major administrative hurdles concerning asset and liability assessment, high and distortionary effective rates, among other problems that make it an inefficient revenue source.”
Jared Walczak, vice president of state programs at Tax Foundation, told Fox News Digital that the proposed wealth tax in California would be “economically disruptive, difficult to manage, and will drive many rich residents – and all their existing tax payments — out the state.” “The plan sets aside as much as $660 million per year, or more than $40,000 per potential taxpayer, for merely administrative costs, giving an idea of how challenging such a tax would be to implement.”
According to a recent analysis by James Doti, president emeritus and economics professor at Chapman University, people are already relocating from high-tax states to low-tax ones. Between July 2021 and July 2022, he discovered that net domestic migration caused the ten states with the highest tax burdens to lose almost 1 in 100 residents, while the ten states with the lowest tax burdens saw a gain of nearly 1 in 100.
According to Patrick Gleason, vice president of state affairs at Americans for Tax Reform, California lawmakers advocating the wealth tax believe they can “get around” the issue of citizens leaving the state “by trying to tax people even after they leave the state.” However, he, Gray, and Walczak all questioned the legitimacy of such a strategy or categorically declared it unconstitutional.
According to other studies, the top 1% of taxpayers in New York, California, and other states contribute around 50% of state income taxes, raising the question of how detrimental a mass flight of wealthy citizens may be to tax collection.
A wealth tax, according to Walczak, would be particularly difficult for California. He quipped that those in Texas, where some prominent Californians have recently migrated, should be the most enthusiastic about such a law.
According to Walczak, the owners of promising enterprises might be taxed on hundreds of millions of dollars worth of predicted economic value that never actually materializes.
This could be especially harmful in California, which is home to many digital start-ups. “While many taxpayers would be forced to pay the wealth tax, very few people would pay it. Only those working in Texas’ economic development office should embrace a California wealth tax.
However, some advocates for wealth taxes contend that doing so is essential to reducing economic inequality. Delegate Jheanelle K. Wilkins, a Democrat from Maryland, has presented a bill that would reduce the current threshold for inheritance taxation from $5 million to $1 million. After the COVID-19 outbreak exposed the wealth disparity between the rich and the poor, she predicted that support for such views would increase.
She told the Washington Post, “That’s a lot of money we’re leaving on the table. Other advocates contend that wealth taxes are modest and that the wealthy can afford them. Experts point out that the rates have a disproportionate impact because they are based on net wealth rather than income.
In a recent blog post, Walczak used the example of a $50 million investment that was kept for 10 years and generated a nominal annual rate of return of 10% in a setting of 3% yearly inflation to demonstrate the point.
After 10 years, that investment would have generated $46.5 million in investment returns in current terms without a wealth tax. However, a 1% wealth tax would result in $37.3 million, eliminating about 20% of the earnings.
According to Walczak, wealth taxes “cut heavily into investment profits, to the disadvantage of the larger economy.” “If the ultra-wealthy have lesser net worths, average taxpayers might not care. But if innovation stops and investments fall, people will undoubtedly notice.
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