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

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.

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.

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.”

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.

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.

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.

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.

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.

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.

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

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.

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.

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

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.

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.

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

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

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.”

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

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

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

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.

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.