California’s New Exit Tax for Those Moving Out of State

By: Georgia | Last updated: Mar 25, 2024

Finance expert John Williams has recently analyzed California’s new tax policies, which include the introduction of a wealth tax targeting affluent residents and an exit tax for those relocating out of the state.

These measures aim to address California’s significant budget deficit, which has reached $68 billion. The state’s approach to increasing revenue involves direct taxation on the assets of the wealthy, with additional scrutiny on asset reporting.

Addressing the Budget Deficit Through Taxation

John Williams highlights California’s substantial budget deficit of $68 billion. The state’s response involves implementing a wealth tax, which includes the annual taxation of the rich based on their assets.

Advertisement
A conceptual image depicting a red arrow trending downward, to the right of which are stacks of gold coins in descending order representing a decrease in money or economic downturn

Source: freepik

This initiative is part of a broader strategy to increase state revenue and involves the use of attorneys to investigate and potentially litigate against affluent individuals for underreporting their wealth.

Advertisement

The California Exit Tax Explained

The proposed wealth tax in California introduces a potential exit tax for individuals and businesses that decide to move out of the state.

Advertisement
The image captures a serene sunset on a street leading to Buena Vista Park in San Francisco

Source: Robert Bye/Unsplash

Although not explicitly labeled as an exit tax, the legislation could impose a significant financial burden on those choosing to relocate to areas with lower tax rates. This move is seen as a way to retain tax contributions from wealthy residents.

Tax Rates and Implications for High Net Worth Individuals

Starting in 2024, the proposed tax rate would be 1.5% for net worths exceeding $1 billion. From 2026, the rate would adjust to 1% for net worths over $50 million.

Advertisement
A top-down view of a workspace showing a person's hands typing on a laptop keyboard on the right, with a black calculator to the left, displaying numbers on its screen. A black pen and two coins, one stacked on the other, are also present on the white surface

Source: snowing/freepik

This tax aims to apply to full-time, part-year, and temporary residents of California, with specific provisions for apportionment. The exit tax mechanism is designed to allow taxation for several years after a taxpayer leaves California, classifying them as a “Wealth Tax Resident.”

Exemptions and Scope of the Wealth Tax

The proposed wealth tax is structured to not affect California residents with a net worth below $50 million.

Advertisement
Silhouettes of tall palm trees against a vibrant sunset sky with hues of pink and orange. Two birds can be seen flying in the distance

Source: Viviana Rishe/Unsplash

Only those already subject to the wealth tax would be required to pay the exit tax upon relocating outside the state. This policy is part of a legislative effort to ensure fair taxation while considering the impact on various residents’ financial situations.

Legal and Constitutional Concerns

Critics have raised concerns about the legality of the proposed wealth and exit taxes, debating their constitutionality.

A historical painting depicting the Founding Fathers signing the Constitution

Source: Wikimedia Commons

There are questions regarding the violation of the Due Process or Commerce Clauses of the Constitution, specifically whether taxing individuals no longer residing in California or discriminating against interstate commerce is lawful. These legal challenges highlight the complex nature of implementing such taxes.

Advertisement

Real-world Consequences for California Residents

Williams discusses the real-life impacts of these tax policies, focusing on the challenges faced by individuals heavily invested in California’s real estate market.

An aerial view of a winding coastal highway in California. The road curves along the lush green hillsides and rugged cliffs overlooking the Pacific Ocean

Source: Bobby Yang/Unsplash

The declining property values, combined with increasing taxes, pose significant financial risks. This scenario underscores the broader economic implications of the state’s tax policies on its residents.

Advertisement

Potential Spread to Other States

Williams warns that California’s tax measures could serve as a model for other states facing financial difficulties.

long-exposure photograph captures the bustling nightlife in front of Philadelphia City Hall

Source: Heidi Kaden/Unsplash

There’s a concern that cities like Philadelphia, Boston, Atlanta, and Chicago might adopt similar tax policies. This speculation suggests a possible trend of increased taxation targeting the wealthy across different states.

Advertisement

Public Outcry and Constitutional Debates

The public has voiced strong opinions against the exit tax, with many claiming it violates constitutional rights.

On a green background, gold coins are piled next to wooden blocks spelling out 'TAXES' with a white percentage symbol and a calculator resting on a notepad nearby

Source: Nataliya Vaitkevich/Pexels

Comments such as “Taxing people for leaving CA? That is unconstitutional,” and “How is this even legal???” reflect widespread dissatisfaction and concern over the restrictions on freedom of movement imposed by these tax policies.

Advertisement

Overview of California's Wealth Tax Legislation

California’s proposed wealth tax casts a wide net, targeting not just full-time residents but also part-time inhabitants and those who have recently moved away. The tax’s reach extends to a proportion of an individual’s wealth, calculated based on the days spent in California each year.

A daytime shot capturing busy traffic on the Golden Gate Bridge. Cars travel in both directions on the iconic red structure

Source: Andrea Leopardi/Unsplash

Even after leaving the state, former residents may find themselves obligated to pay the wealth tax, emphasizing the state’s intent to secure revenue from a broad base of wealth holders. This tax encompasses a vast array of assets, from shares in partnerships and private-equity interests to artwork and financial assets located abroad.

Advertisement

Financial Implications of the Wealth Tax

The wealth tax is estimated to raise approximately $21.6 billion annually, assuming no significant exodus of wealthy individuals from the state.

An aerial view of the San Francisco Bay area at twilight shows city lights beginning to sparkle. The Bay Bridge stretches across the water, and a ship docks near the illuminated pier, with the marina full of boats in the foreground

Source: Brandon Nelson/Unsplash

However, this revenue may still fall short of covering California’s budget deficit and increasing Medicaid costs.

Advertisement

California's Shrinking Population

The shrinking population in California would have an impact on the success of the wealth tax. In 2023, California experienced a significant population decrease, with tens of thousands of residents leaving the state. 

A scenic view of the Golden Gate Bridge during sunset, with the structure casting a warm glow. The bridge spans across the water with a backdrop of hills

Source: Wikimedia Commons

According to estimates by the U.S. Census Bureau, the state’s population declined by about 75,400 over 12 months, leading to a new total of over 38.96 million as of July 1.

Advertisement

The Departure of Wealthy Californians

A notable portion of those leaving California includes some of the state’s wealthiest individuals. 

An aerial view of a coastal town with densely packed, multicolored houses climbing up the hillside. In the foreground, palm trees frame the view, and further down the slope, a harbor with boats docked along a pier is visible

Source: Dan Cutler/Unsplash

This exodus poses a risk to California’s tax revenue, as 40% of the state’s tax income is derived from earners in the top 1%. The migration of these high earners could significantly impact the state’s financial stability.

Advertisement

Migration Figures Highlight Concerns

Jared Walczak, Tax Foundation Vice President of State Projects, highlighted the issue in an interview with FOX Business, describing California’s migration numbers as “even more stark” than the population figures. 

An elevated view of Hollywood Boulevard at dusk, showcasing the vibrant street life and the famous Walk of Fame stars on the sidewalk. The busy road is lined with palm trees and neon-lit storefronts, with cars captured in motion

Source: Wikimedia Commons

The movement of these taxpayers is alarming for the state’s economy, as it faces challenges in maintaining its tax revenue levels.

Advertisement

Net Loss in Tax Returns

Fox Business reports that according to IRS migration data, California saw over 399,400 tax returns leave the state, with only 241,200 coming in during 2020-2021. 

A photograph of a large neoclassical government building under a clear blue sky. The building features a row of robust columns and an impressive facade with a central tower featuring a conical roof

Source: Wikimedia Commons

This resulted in a net loss of approximately 158,200 returns. For individuals, the net loss exceeded 331,700 people within the same timeframe, indicating a significant outflow of residents.

Advertisement

Financial Strain on California

California’s economic challenges are highlighted by its reliance on a small percentage of high earners for a substantial portion of its tax revenue. 

An image capturing the essence of suburban life in California, featuring the upper section of a home with a terracotta tile roof and arched windows. A tall palm tree stands prominently in the yard against a clear blue sky

Source: Kevin Fitzgerald/Unsplash

The state’s budget is uniquely susceptible to fluctuations in the stock market and the economic decisions of the wealthiest Californians. As these individuals begin to leave the state, the potential for a significant reduction in tax revenue grows, posing a risk to the stability and sustainability of public funding and services.

Advertisement

Wealthy Residents Moving Out

The state has observed a decline in tax returns from high earners, with over 27,300 fewer returns reporting an adjusted gross income of at least $200,000 between 2020 and 2021. 

A view of a large, multi-story house with Spanish architectural elements, including a terracotta roof, stucco exterior, and ornate balconies. The house is situated directly on the waterfront, with a pier extending into the water. Palm trees and an American flag are visible, and a couple of people can be seen sitting on a bench near the house

Source: Erin Song/Unsplash

This trend is concerning for California, which has long relied on the contributions of its wealthiest residents to support its budget.

Advertisement

Challenges in Retaining Population

California’s challenges are multifaceted, including high living costs, the housing market, and the rise of remote work, as reported by the Los Angeles Times

Close-up of an open laptop displaying a virtual group meeting with multiple participants' video feeds. In the foreground, a ceramic coffee mug is in focus on a wooden table, adding a cozy touch to the remote work setting

Source: Chris Montgomery/Unsplash

These factors, combined with the state’s high taxes, are prompting residents, including wealthy ones, to relocate.

Advertisement

A Governor's Confidence Amid Challenges

In the face of a dwindling population and a looming budget deficit, Governor Gavin Newsom remains optimistic about California’s future. 

The Governor of California stands speaking at a podium outdoors, with the state seal visible in the foreground. He's dressed in a black jacket over a white shirt and appears to be mid-speech

Source: GavinNewsom/X

During an interview on “Hannity,” Newsom provided insight into the recent population decrease and the state’s economic struggles when compared to Florida. He emphasized an interesting statistic to counter concerns: “Per capita, more Floridians move to California than California is moving to Florida.”

Advertisement

Economic Implications of Population Decline

The decline in California’s population and the exit of high net worth individuals are affecting the state’s economic framework. 

An expansive backyard of a large home with a curved swimming pool in the foreground surrounded by a concrete patio. The pool features a waterslide and is adorned with decorative rocks

Source: Oak + Motion/Unsplash

These shifts threaten the long-term funding of California’s programs, which depend heavily on continued population growth and high earnings.

Advertisement

Addressing the Budget Deficit

To address its $68 billion budget deficit, California may need to utilize its $24 billion in reserves and consider reducing spending in certain areas, including Proposition 98 spending. 

Governor Gavin Newsom stands at a podium with the California OES emblem, addressing an audience at an outdoor press conference. Accompanying him are several officials, including police officers in uniform and other dignitaries

Source: Wikimedia Commons

These measures are part of the potential solutions being evaluated to manage the state’s financial challenges.

Advertisement

Broader Trends of Population Decline

While California’s situation is notable, it is not unique. 

A serene sunset casts a warm glow on a beachside promenade lined with tall palm trees. The walkway, bordered by a white balustrade, leads towards a pier in the background

Source: Mark Neal/Unsplash

The populations of seven other states also declined in 2023, reflecting broader demographic trends that various states are navigating in the United States.

Advertisement

National Population Growth

Despite the challenges faced by California and other states, the United States as a whole continues to grow. 

A busy crosswalk scene with pedestrians and cyclists crossing the street, flanked by tall palm trees. The sunset casts a golden hue over the scene, highlighting the 'Ocean' street sign and the vibrant activity of the crowd

Source: Jack Finnigan/Unsplash

The national population reached 334.9 million in 2023, growing by 1.6 million people over 12 months. This growth underscores the dynamic nature of the country’s demographic landscape.

Advertisement

Future Concerns and Fiscal Sustainability

The introduction of the wealth and exit taxes in California raises questions about the state’s fiscal sustainability and its impact on resident taxpayers, including those not directly affected by the wealth tax.

A street view in a Hollywood neighborhood lined with tall palm trees. In the distance, the famous Hollywood sign sits on the hillside under a hazy sky, with residential homes on one side and parked cars lining the street

Source: Caleb George/Unsplash

There’s a growing concern that, over time, the financial burden may extend beyond the wealthy, potentially affecting the middle class and altering the state’s economic landscape.

Advertisement