Wealth Tax Could Be California’s Nuttiest Idea Yet

Demonstrators protest tax reform legislation in Los Angeles on Dec. 4, 2017. Frederic J. Brown/AFP via Getty Images

Commentary

It’s getting more dangerous to make money and create jobs in California.

Under Assembly Bill 259, by Assemblyman Alex Lee (D-San Jose) the state would “impose an annual tax at a rate of 1.5 percent of a resident of this state’s worldwide net worth” in excess of $1 billion starting in 2024.

Starting in 2026, the threshold would drop to just $50 million of worth, taxed at 1 percent.

Note it’s a “worldwide” tax. So property in other states or countries would be taxed. That would be a headache right there. How does one assess value in another country, with different systems of valuation, even different languages? Maybe you could do it in Singapore, which has an advanced economy where many people speak English. But how about investing in cobalt mines in the Congo, subject to price fluctuations, local upheavals, and the interference of Communist Chinese mining interests?

AB 259’s language says the tax would be imposed for an asset sale “at any time within the past 10 years … the taxpayer shall report the valuation” to the Franchise Tax Board (FTB). This apparently means the taxpayer would be liable for such transactions even if he left the state, until the 10 years of “valuation” eventually expired.

The tax would be on top of the current 13.3 percent top state income tax rate, the highest in the country.

And get this. AB 259’s administrative costs alone would start at $300 million a year, then be “adjusted the second year for inflation using the California Consumer Price Index.” Plus another $100 million a year for the next three years, also adjusted for inflation. That comes to $600 million, plus inflation, just to grab the taxes.

No doubt AB 259 would be challenged in court. But the FTB has a history of harsh litigation, as in the nearly three-decades-long case it ran against microchip inventor Gilbert Hyatt after he moved to Nevada to avoid California’s high taxes. When the third of three U.S. Supreme Court cases was decided in 2019, Dan Walters wrote, “Although California won last week, it was something of a hollow victory, since Hyatt largely prevailed on the initial dispute over his residence. The state spent an estimated $25 million to pursue the inventor so probably wound up in the red.”

AB 259 has been joined by similar proposed new tax laws in at least seven other states, all blue (Democratic) states, of course: Connecticut, Hawaii, Illinois, Maryland, Minnesota, New York and Washington. The anomaly is Washington, which currently boasts no state income tax.

The idea of the states colluding like this is to prevent tax refugees from taking advantage of the low taxes in other states. Although why anyone would move from California to New York is a mystery. At least California has great weather. The general movement is of tax refugees is to low-tax red states. That can be seen in the recent reshuffling of congressional districts, in which California and New York lost one each, while Florida gained one and Texas, two.

And what if taxpayers flee to other countries and sell all their U.S. assets? How will California be able to tax them? If they don’t pay, will the FTB send the California National Guard to collect?

For now, at least, AB 259 is likely to follow similar proposals into oblivion—such as last year’s Assembly Bill 2289, also by Sen. Lee. Gov. Gavin Newsom has opposed such tax increases likely because he doesn’t want to be seen as a tax-hiker before a possible presidential bid.

But with President Biden’s approval rating in trouble, the prospects of Newsom entering the White House have increased. If Lee keeps pushing AB 259 and similar bills every year, eventually a new governor could back it.

According to Lee, “With this modest tax on the ultra-wealthy who pay a lower effective tax rate than the bottom 99 percent, we would have sustained investments in our schools, tackle homelessness, maintain and expand needed services, and much more.”

Actually, the tax, if it becomes law, further would drive the wealthy from California. The U.S. Supreme Court seems unlikely to uphold the part grabbing taxes for 10 years from anywhere on the planet.

And even if that were upheld, AB 259 would be a kind of tax Teflon, repelling any rich people from moving here, or even investing here.

In my 36 years of writing on California taxes and budgets, this is the nuttiest idea yet.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.