The tax rate would be 0.4 percent of net worth, excluding directly held real estate, that exceeds $30 million for single and joint filers and $15 million for married filing separately.
California is facing a big budget deficit because of the health and economic crisis brought on by the coronavirus, and “we can’t simply rely on austerity measures,” to close it, said Rob Bonta, D-Oakland, lead author of AB2088. “We must consider revenue generation.”
He admitted that the union-sponsored bill will not be heard before the Legislature adjourns Aug. 31, but “it can be reintroduced on day one of the next session.” Bonta said he would like to see a wealth tax passed in addition to the “millionaires tax” proposed in a bill introduced in late July. AB1253 would add surcharges of 1 percent to incomes (joint or single) between roughly $1 million and $2 million, 3 percent on income between $2 million and $5 million, and 3.5 percent on income greater than $5 million, bringing the top rate to 16.8 percent. California’s top rate today, at 13.3 percent, is already the highest in the nation.
People subject to the wealth tax would report it to the Franchise Tax Board along with their income taxes. They would have to report all assets including stock in publicly and privately traded corporations; interests in partnerships, private equity or hedge funds; cash, bonds and savings accounts; mutual funds, futures and options; art and collectibles; offshore financial assets, pension funds, non-mortgage debt, real property and mortgage debt.
“Directly held real property, and mortgages and other liabilities secured by directly held real property,” must be reported, but would not be considered in calculating the taxpayer’s worldwide net worth, the bill said.
Real estate would be exempt from the wealth tax because it’s already subject to property tax, at a higher rate, Bonta said.
“It is far easier to call for a state-level wealth tax than it is to actually design an enforceable one,” said Jared Walczak, a vice president with the Tax Foundation, a think tank. Maybe that’s why no state has imposed one.
“Some New York legislators are floating the idea, but Governor Cuomo has poured cold water on the notion, rightly concerned that it would lead to an exodus of high net worth individuals from the state,” Walczak said via email.
Implementing a wealth tax at the state level “would be extremely complex, with questions of how to value illiquid assets and whether residents’ out-of-state wealth — including their investment holdings — can be taxed.” He added that “any tax that is actually effective at taxing wealth, however, would be equally effective at driving wealth out of state.”
Emmanuel Saez, a UC Berkeley economics professor, said income tax is not an effective way to tax the ultra-wealthy, because they can avoid the income tax as long as they don’t cash in their investments. Facebook CEO Mark Zuckerberg could avoid the income tax as long as he doesn’t sell his Facebook stock, and if he moved to Florida before realizing his gains, he may never owe tax to California, Saez said during a call announcing the bill.
Saez said the bill would not deter startups because it would let entrepreneurs defer the wealth tax for a period of time.
“Liquidity-constrained taxpayers with ownership interests in hard-to-value assets and business entities, such as startup businesses, shall be able to elect for an unliquidated and deferred tax liability to be attached to these assets instead of the net value of these assets being assessed at the end of a tax year.” The taxpayer would have to sign a contract with the state specifying when the tax would be paid.
In a paper he co-authored, Saez said that California has 12 percent of the U.S. population but 17 percent of all U.S. millionaires and 25 percent of its billionaires. In 2011, California had only 15.5 percent of the nation’s millionaires and 21 percent of billionaires. The wealth tax, he said, would hit about 0.15 percent of California tax filers.
The Franchise Tax Board would administer the tax.
“The state approved $9.2 billion in business tax increases in the new budget, but Sacramento politicians and special interests continue to seek income tax increases, property tax increases, a ‘headcount tax’ on in-state employees, and this new annual tax on money that was left over after all the other taxes were paid,” Robert Gutierrez, president of the California Taxpayers Association, said in a statement.
He noted that “a very small number of Californians pay the vast majority of state income taxes. When the constant drumbeat for outrageous tax hikes drives them away, who will pick up the tab?”
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