25/01/23

US: California's lawmakers consider wealth tax of 1.5% on anyone with a global worth above $1 billion and 1% for those whose wealth is above $50 million.

As published on dailymail.co.uk, Wednesday 25 January, 2023.

California lawmakers are pushing legislation that would impose a new tax on the state's wealthiest residents, even if they have already moved to another part of the country.

Assemblyman Alex Lee, a progressive Democrat, last week introduced a bill in the California State Legislature that would impose an extra annual 1.5% tax on those with a 'worldwide net worth' above $1 billion, beginning January 2024.

As early as 2026, the threshold for being taxed would decrease. Those with a worldwide net worth exceeding $50 million would have to pay a 1% annual tax on wealth, while billionaires would still be taxed 1.5%.

Worldwide wealth includes diverse holdings such as farm assets, arts and other collectibles, as well as stocks and hedge fund interest.

California already taxes the wealthy more than most states, with the top 1% of earners accounting for about half of the state’s income tax collections.

According to Forbes' 2022 World's Billionaires list, there are 186 billionaires living in California, down from 189 the year before, but far more than any other state.

In 2020, California had the greatest number of millionaire households in the US, with 1.14 million households having one million or more in investible assets.

The legislation is an altered version of a wealth tax approved in the California Assembly in 2020, which the Democrat-led state Senate did not pass.

The version just introduced includes measures to allow California to impose wealth taxes on residents even years after they have left the state for another location.

The bill includes provisions to create contractual claims tied to the assets of a wealthy taxpayer who does not have the cash to pay their annual wealth tax bill because most of their assets are not easily converted into cash.

This claim would force the taxpayer to make annual filings with California's Franchise Tax Board and later pay the wealth taxes owed, even if they have moved out of the state.

California was one of several blue states last week to unveil bills to bring in new wealth taxes, along with Connecticut, Hawaii, Illinois, Maryland, Minnesota, New York and Washington.

Each state's proposal contained a different tax approach, but they all concentrated on the idea that the rich must pay more.

Lee has made public statements supporting this message.

'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 said the tax would impact 0.1% of California households and generate an additional $21.6 billion in state revenue, which would be directed at the state general fund.

California has one of the highest taxes of any US state.

Advocates argue that the money could be used to bolster funding for schools, housing and other social programs.

Lee hopes it could help to iron out California's $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.'

Some critics argue that the bill will have the opposite effect, through high administrative costs and causing people to leave the state in large numbers.

Jared Walczak, vice president of state projects at Tax Foundation, told MailOnline: 'California's proposed wealth tax is anything but modest. Assuming ordinary rates of market returns, a 1.5 per cent tax on the highest net worth Californians would be the equivalent of raising the state's income tax rate to 33 per cent on their investment income.

'The federal capital gains tax rate is 20 per cent, to put that in context. Extraordinarily high taxes on wealth and investment will drive the wealthiest Californians out of state, taking their other tax dollars, and sometimes their businesses, with them.

'California is projecting $208 billion in general fund revenue for the current fiscal year, up from 146 billion in FY 2020. The state has a deficit despite significant revenue growth. A voracious appetite for new spending has wiped out what should have been a large surplus.'

A recent analysis by James Doti, president emeritus and economics professor at Chapman University, found that the 10 highest tax states lost nearly 1 in 100 residents in net domestic migration between July 2021 and July 2022, while the 10 lowest tax states gained almost 1 in 100.

California lawmakers pushing the wealth tax believe they can 'get around' the issue of residents leaving 'by trying to tax people even after they leave the state,' said Patrick Gleason, vice president of state affairs at Americans for Tax Reform.

Gordon Gray, director of fiscal policy at the American Action Forum, told MailOnline: 'One observation is that the emerging California approach, at least by the lights of one of its advocates, appears to be entering the world in much the same fashion as the glossier national plans: with extravagant claims the policy will be unable to deliver.

'Wealth taxes by their nature involve significant administrative challenges with respect to asset valuation. Despite the breezy dismissal of the headline rate, effective rates under wealth taxes can be very high, which among other problems render these taxes inefficient revenue sources.'

He added: 'One prominent national wealth tax proposal that was subject to more rigorous analysis found it would bring in a fraction of the revenue claimed by its advocates. These features are exacerbated at the state level because the tax is that much easier to avoid. Florida is pretty nice six months and one day of the year…

'This is separate and apart from legal concerns. California would seek to continue to tax non-residents through exit taxes. While I’m not a lawyer, this approach would potentially run afoul of the interstate commerce clause, as well as fundamental rights to travel and associate freely.'

Past studies have shown that the top 1% of taxpayers pay around 50% of state income taxes in New York, California and elsewhere.

This has led to questions about the damage a mass exodus of wealthy residents could do to tax revenue.

Walczak noted that a wealth tax would cause huge problems for California, joking that the people most excited about this type of law should be people in Texas, where some high-profile Californians have moved to in recent years.

'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.

He added: '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.'

However, some argue that wealth taxes are vital for combatting economic inequality.

Maryland Democrat Delegate Jheanelle K. Wilkins has proposed a bill so that families would owe taxes on inheritances over $1 million, instead of $5 million, as is the case today.

She said such ideas will now gain more support after the coronavirus pandemic exposed the stark divide between the rich and poor.

'That's quite a bit of funds that we're leaving on the table,' she told the Washington Post.

Other supporters say wealth taxes are slight and of no significant detriment to the rich.

However, experts note that because the rates are on net worth, rather than on income, they have an outsized effect.

Walczak highlighted this in a recent blog post, using as an example a $50 million investment, held for 10 years and earning a 10% nominal annual rate of return in an environment of 3% annual inflation.

Without a wealth tax, that investment would bring in $46.5 million in investment returns, in current dollars, after 10 years.

With a 1% wealth tax, it would yield $37.3 million, cancelling out almost 20% of the gains.

Wealth taxes 'cut deeply into investment returns, to the detriment of the broader economy,' wrote Walczak.

He added: 'Average taxpayers may not care if the ultra-wealthy have lower net worths. But they will certainly care if innovation slows and investments decline.'

Alex Lee represents California's 24th Assembly District, which includes the Alameda County communities of Fremont, Newark, and Sunol, and the Santa Clara County Communities of Milpitas and San Jose.

Lee was elected in 2020 and he currently Chairs the Assembly Environmental Safety and Toxic Materials Committee.

Previously, he worked on statewide policy regarding public safety, climate change, and education for California State Senator Henry Stern and Assembly member Evan Low.

According to Forbes, the slight decline in billionaires in California in 2022 from a year earlier was due to a few high-profile people on the list moving out of the state, including Luminar founder Austin Russell, private equity executive Orlando Bravo and Slack CEO Stewart Butterfield.

Russell and Bravo moved to Florida, while Butterfield went to Colorado.

Almost half of the state's billionaires come from tech. Much of that wealth is centered around the San Francisco Bay Area, where 116 of California's billionaires live.

That includes the state's richest residents, Google cofounders Larry Page and Sergey Brin.

Some 67 billionaires live in Southern California, including 45 in Los Angeles, the singer Rihanna and Snapchat founder Evan Spiegel.