Legislative Update

New Wealth Tax Introduced Just Ahead of Deadline

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Just ahead of the February 18 deadline for introducing bills in the 2021-22 legislative session, Assembly Member Alex Lee reintroduced his “wealth tax” proposal in the form of AB 2289. The tax would apply to – but would not be limited to – art and collectibles, real property, pension funds, financial assets held offshore, farm assets, mutual funds, index funds, and stocks.

“Last year’s version of the wealth tax led many Californians to rethink living in California, just by virtue of being introduced,” CalTax President Robert Gutierrez said. “In the last year, these taxpayers sought out legal advice, hired tax experts who specialize in residency issues, and seriously reconsidered their future in California. The new-and-not-improved proposal will prompt more wealthy Californians to pack their bags and move – a bad idea considering they represent a major portion of our tax base.”

The top 5 percent of earners in California account for roughly two-thirds of the total personal income tax revenue received by the state, and are largely responsible for the record revenue surplus collected by the state.

“If high earners leave – and they will, to avoid the tax hike as well as the headache of having to annually appraise everything they own, anywhere in the world – the taxpayers left in California will be asked to pay more,” Gutierrez said.

CalTax opposes AB 2289 and will continue leading a large coalition against the tax.

AB 2289 includes these provisions:

  • For the tax years 2023 and 2024, imposes a new 1.5 percent annual tax on a California resident’s “worldwide net worth” in excess of $1 billion, or in excess of $500 million in the case of a married taxpayer filing separately.
  • For tax year 2025 and beyond, the tax would be changed to 1 percent of a California resident’s “worldwide net worth” in excess of $50 million (or $25 million for a married taxpayer filing separately), as well as an additional tax at a rate of 0.5 percent of a resident’s “worldwide net worth” in excess of $1 billion (or $500 million for a married taxpayer filing separately).
  • “Worldwide net worth” is defined with reference to specific federal provisions and would not include specific assets, including personal property situated out of state, directly held real property, or liabilities related to directly held real property.
  • High-wealth Californians who establish residency outside the state would continue to be subject to the tax for several years based on a complicated formula outlined in the bill. Also, a nonresident “shall be subject to the tax … to the extent the nonresident has extreme wealth sourced to this state.”
  • The Franchise Tax Board would be authorized to adopt regulations to carry out the tax provisions, “including regulations regarding the valuation of certain assets that are not publicly traded.” The bill includes extensive descriptions of how values of stocks and certain assets could be determined, along with restrictions on transferring wealth to avoid taxation, and large penalties for understating assets or attempting to evade the tax.
  • This bill would establish a new bureaucracy called the “Wealth Tax Advisory Council.” The council would be required to determine “an adequate level of annual funding and staffing for the administration and collection of the wealth tax imposed by this measure.” AB 2289 would weaken legislative oversight by establishing two continuously appropriated funds in the State Treasury to cover the expenses of the administration and collection of the wealth tax, and the funds would be funded by the greater of either a specified amount or a certain percentage of revenue estimated to be generated by the tax.
  • The bill specifies that the “wealth tax” will become operative only if a proposed constitutional amendment, ACA 8, is approved by a majority of voters in a statewide election and takes effect. ACA 8 was introduced almost one year ago, and has yet to be referred to a committee for its first hearing. As a proposed constitutional amendment, it is not subject to the same deadlines as bills.

Last year’s version, AB 310, was assigned to the Assembly Revenue and Taxation Committee and died there without ever coming up for a vote. Under legislative rules, AB 2289 cannot be heard in a committee for at least 30 days.