The pandemic has put a $50 billion dent in California’s finances and Democrats are busy coming up with new ways to raise more tax money. Plans to consider a tax hike on those making more than $1 million was just put off until next year, but now a California Assemblyman has proposed a wealth tax on top earners:
A group of state lawmakers on Thursday proposed a first-in-the-nation state wealth tax that would hit about 30,400 California residents and raise an estimated $7.5 billion for the general fund.
The tax rate would be 0.4% of net worth, excluding directly held real estate, that exceeds $30 million for single and joint filers and $15 million for married filing separately.
California is facing a big budget deficit because of the health and economic crisis brought on by the coronavirus, and “we can’t simply rely on austerity measures,” to close it, said Rob Bonta, D-Oakland, lead author of AB2088. “We must consider revenue generation.”…
People subject to the wealth tax would report it to the Franchise Tax Board along with their income taxes. They would have to report all assets including stock in publicly and privately traded corporations; interests in partnerships, private equity or hedge funds; cash, bonds and savings accounts; mutual funds, futures and options; art and collectibles; offshore financial assets, pension funds, non-mortgage debt, real property and mortgage debt.
To be clear, property would not be considered as part of total wealth because it’s already taxed by property taxes, but they have to report it anyway. UC Berkeley economist Emmanuel Saez co-wrote a paper about the new tax. It makes clear that the wealthy would not be able to flee the state to avoid it because the wealth tax would continue for 10 years after someone leaves the state:
The wealth tax bill is also structured in such a way CA wealthy residents who leave still have to pay the extreme wealth tax on a fraction of their wealth for up to 10 years: they pay tax on 90% of their wealth the year after they leave, on 80% 2 years after they’ve left, .. , on 10% 9 years after they’ve left, 0% 10 years or more after they’ve left. The logic is that wealth is the fortune you built over a lifetime and hence a wealth tax requires looking beyond the current year. This makes the wealth tax much harder to avoid than the income tax (where you are no longer liable after leaving the state).
In order to prevent the new tax from discouraging the wealthy from entering the state, it also ramps up in the opposite way.
Symmetrically, the wealth tax kicks in progressively for new residents. They pay tax on only 10% of their wealth in their first year, on 20% in their second year, … , on 100% only after 10 years. Therefore, the wealth tax is extremely modest for wealthy newcomers who built their fortune outside of California.
I guess that might help prevent wealthy people from moving in but it will remind them every year that they are paying a price to stay. I can’t stop thinking that this new proposal turns residence in California into a kind of marriage. Once you’ve been here a while you can separate but you still have to pay a kind of alimony for a decade afterwards.
The LA Times published an opinion piece yesterday by the paper’s Deputy Editorial Page Editor. He argues the issue needs a lot more study before it gets pushed forward:
Perhaps more important, lawmakers are being asked to enact a major new tax without considering how it will interact with the other taxes on the books. Here’s just one question they’d need to study: By forcing people to sell assets potentially at a loss in order to pay their tax bills, will the measure cut into the capital gains revenue upon which California is inordinately dependent?
The point is, developing good tax policy requires more than just deciding which trees to shake. It’s looking at the whole forest of intertwined limbs, and figuring out how a measure aimed at one stand of trees will affect the others. It’s about balancing different types of taxes — those on income, consumption and wealth — to create the best incentives and place the lightest drag on the economy.
Here’s the California Assemblyman who proposed the tax talking about it with Neil Cavuto: