The bill was introduced last week by progressive Democrat Alex Lee, which is looking to impose an extra 1.5 percent annual tax on Californians with a “worldwide net worth” greater than $1 billion, beginning January 2024, with the intention of lowering the threshold to $500 million by 2026, Fox News reports.
“Worldwide net worth” incorporates diverse holdings such as farm assets, arts and other collectibles, as well as stocks and hedge fund interest.
This is the second time in three years that a wealth tax has been approved by the California Assembly. A similar bill from 2020 was ultimately shot down by the state Senate.
This updated version will allow California to impose the tax on residents for years after they've left the state.
“Exit taxes aren't new in 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 their annual wealth tax bill because most of their assets aren't easily turned into cash. This claim would require the taxpayer to make annual filings with California's Franchise Tax Board and eventually pay the wealth taxes owed, even if they've moved to another state,” Fox News reported.
California was one of several blue states, alongside Connecticut, Hawaii, Illinois, Maryland, Minnesota, New York and Washington, to introduce a bill imposing a wealth tax. While each state's bill applies a different approach to the tax, they all operate on the simple premise that the rich must pay more.
“The working class has shouldered the tax burden for too long,” Lee tweeted. “The ultra-rich are paying little to nothing by hoarding their wealth through assets. Time to end that.”
Lee claims that the tax would affect just 0.1 percent of households, but generate $21.6 billion in state revenue, which he hopes will help the state pay off its $22.5 billion budget deficit.
“This is how we can keep addressing our budgetary issues,” he told the Los Angeles Times. “Basically, we could plug the entire hole”
However, some experts believe that the bill could have the opposite effect, resulting in a mass exodus of the rich and their business.
“It brings significant administrative challenges with respect to asset and liability valuation, high and distortionary effective rates, among other problems that make it an inefficient revenue source,” Gordon Gray, director of fiscal policy at the American Action Forum, told Fox News.
Other experts echoed these concerns.
“The proposed California wealth tax would be economically destructive, challenging to administer and would drive many wealthy residents — and all their current tax payments — out of state,” Jared Walczak, vice president of state projects at Tax Foundation, told Fox News.
“The bill sets aside as much as $660 million per year just for administrative costs, more than $40,000 per prospective taxpayer, giving an idea of how difficult such a tax would be to administer,” he added.
The last few years under Governor Newsom's leadership have already seen a mass exodus of Californians to red states such as Texas. Walczak quipped that Texans should be the most excited about such a law.
“A wealth tax could be particularly destructive in California, home to so many tech startups, because the owners of promising businesses could be taxed on hundreds of millions of dollars' worth of estimated business value that never actually materializes,” said Walczak. “Very few taxpayers would remit wealth taxes, but many taxpayers would pay the price. The only people who should genuinely love a California wealth tax are the ones who work in Texas' economic development office.”
Supporters of wealth taxes argue that they're necessary to address economic inequality, which the COVID-19 pandemic has exposed and exacerbated.
However, Walczak argues that wealth taxes “cut deeply into investment returns, to the detriment of the broader economy.”
“Average taxpayers may not care if the ultra-wealthy have lower net worths. But they will certainly care if innovation slows and investments decline,” he added.