California’s wealth tax includes state-level exit taxes---serves as a political testing ground and demonstrates uniformity

The recently introduced California wealth tax proposal essentially contains three components. The first, a wealth tax of 1% on household wealth over $50 million and 1.5% on wealth over $1 billion, would apply starting in 2024 and to those with over $50 million starting in 2026. It would be based on worldwide net worth, with some exceptions, and would apply to full-time, part-year, and temporary residents, subject to apportionment. The second component is an exit-tax structure that allows the wealth tax to be applied for several years after a taxpayer leaves California. Also included are provisions that enable certain taxpayers to defer payment by contracting to pay the tax in the future, even if they leave. The third component is an enabling amendment to the California constitution. While the California proposal is unlikely to pass, thanks in part to Gov. Gavin Newsom’s opposition, ultrawealthy taxpayers should be wary of what it portends. The California proposal doesn’t stand alone. Proposed legislation in Hawaii would impose a tax of 1% on state net worth exceeding $20 million, and proposed legislation in Washington would impose a tax of 1% on taxable worldwide wealth over $250 million. Other states, including New York, have taken steps toward taxing the ultrawealthy, though primarily through higher taxes on capital gain and other income. Late last year, Massachusetts imposed a surtax of 4% on income over $1 million through a ballot initiative—and this example is perhaps telling. The “Massachusetts millionaires’ tax” had been introduced and defeated multiple times before finally becoming law. The most recent wealth-tax proposals may not pass this year but, as in Massachusetts, it’s not the first time such proposals have been considered. They, too, may be part of a trend in which voters and politicians gradually become more comfortable with a targeted new tax. Adding to the pressure, some state budget deficits are growing, forcing them to make difficult decisions. In California, the projected deficit of $22.5 billion roughly coincides with the projected $21.6 billion of revenue offered by the wealth tax proposal. Then there’s the national rhetoric surrounding wealth inequality, with several politicians unsuccessfully calling for a national wealth tax. The political hurdles for a national wealth tax, however, are greater than they are in progressive states, making these states a natural testing ground. As for the potential for exit taxation, fears of losing revenue from wealthy taxpayers moving to lower-tax jurisdictions aren’t unfounded. They’re the main reason why the eight states mentioned above acted in concert. According to the US Census Bureau, such migration already has been occurring.