The Dreaded California Wealth Tax Has Finally Arrived

Biden elected not only the state’s attorney general, Xavier Becerra, to run the US health department. He also elected another six to various top government positions. That’s why it’s key to pay attention to important tax bills rolling out of California. They could go federal.

The bill proposes a tax imposition of 1.5% on the assets of Californians with a net worth of $1 billion, and places a 1% tax on those with a net worth of more than $50 million.

Part-timers would be taxed on a certain share of their wealth based on how many days they actually spend in California annually.

This means that any taxable person trying to leave the state to avoid this cannot do so. You can try to leave, but you’ll nevertheless be required to pay the tax.

Pushing things even further, the tax would apply even to assets that are not publicly traded. This means that the state Franchise Tax Board can audit private businesses that are not located in California.

Though the motivation behind exempting real property from the tax are of course unknown, this may be a partiality to high-end real estate and Hollywood donors who favor Democratic state officials. It might also be motivated by a desire to alleviate some of the damage to real-estate sales caused by local mansion taxes in San Francisco and Los Angeles.

Some believe that this is a way of spreading wealth to plaintiff-bar donors, since attorneys who win their cases would be awarded a portion of the state’s recovery.

The $68 billion budget hole arose from dramatically low tax revenue. The shortcoming is so low that it could result in the largest spending cuts since the Great Recession.

Communication Director for Governor Newsom Erin Mellon responded to the dire deficit projections of the state. “Federal delays forced California to pass a budget based on projections instead of actual tax receipts.”

According to the Public Policy Institute of California (PPIC), the state saw an exodus of 281,000 residents in 2021, followed by a 2022 exodus of 211,000 residents. The residents moved to surrounding states and many are unlikely to return in the near future.

Forbes reported from 2021 to 2022 that housing prices rose by 10%. Housing represents a significant percentage of being people’s budgets.

With higher mortgage rates, borrowing becomes more expensive. People will be less likely to enter the market to find a house when they see such a sudden price increase. They will be more likely to choose a home in a cheaper area out of state.

With the increase in housing prices being an issue, it is not surprising to see an increasing number of people who can no longer afford a home. As people experience more financial hardship, tax revenues will surely continue decreasing.

Many of these were large companies like Tesla, Charles Schwab, and Oracle. Some are moving to places like Texas, which is an attractive location because it has no personal tax rate.

In that time, the percentage of unemployed workers rose from 3.8% to 4.8%. Many businesses are cutting payroll costs to combat the tougher economy and cannot afford to expand their operations..

It also doesn’t adequately address the $27 billion increase in spending for Medicaid over the last four years. Medicaid spending is expected to grow even larger this year as the state extends the program’s eligibility to all of the state’s undocumented migrants.

Over 15 million Californians rely on this program. This equates to nearly 40% of all California residents relying on Medi-Cal to cover their healthcare expenses.

Republicans and Democrats alike rejected the bill, and it was put into a suspense file.

The bill, if it did pass, would’ve completely done away with Proposition 13’s limits on taxing property. Governor Newsom himself also shot down the bill, stating that it was not an appropriate measure to take to relieve the state’s budget shortfall.

The Proposition made all real property in the state have a restricted rate of increase on assessments set at no greater than 2% each year. It also established a property tax limit at 1% of the assessed property value. The wealth tax would’ve effectively canceled this Proposition out, which was highly unsavory to many members of the California Legislature.

Newsom also plans to cut $1.2 billion from a $4.6 billion budget to address the state’s homelessness issues. Finally, a proposal to cut environmental programs is included in the governor’s plan to address the deficit.

The top effective marginal tax rate on wage income will increase in 2024 to 14.4% from 13.3%. This is due to a new law that does away with a  $145,600 wage ceiling on a 1.1% state employee payroll tax meant to fund expanded paid family leave. 

Many high-profile candidates, including Joe Biden, have proposed some form of extra taxation on ultra-wealthy citizens. Democrats typically don’t advocate for cutting spending, and would rather make up for rising government spending with increased tax revenue.

The government could put itself into a vicious cycle where it continually increases taxes to replace the lost tax revenue from rich residents leaving, causing more to leave in turn.

The Tax Foundation examined IRS data to see that states like California, New York, and Illinois ranked the highest for income tax losses due to interstate migration.

He has a reputation for being a centrist on fiscal policy, but by supporting a wealth tax, he might suffer political attacks from opponents who would hope to label him as a radical progressive.

The failure of the radical wealth tax has saved the state’s wealthiest for now. However, the state will certainly need to find new ways to tax its citizens if it wants to continue rolling out new program proposals. It’s certainly possible that the middle class could be targeted next.