California’s legislature has a few frenzied days before its session ends to decide whether to adopt a proposal to impose a 0.4 percent tax on personal fortunes north of $30 million ($15 million for married taxpayers filing separately). The draft legislation looks at Californians’ “worldwide net worth” derived from 18 categories of assets — including virtually every conceivable form of financial security, real property, offshore holdings, pension funds, farm assets, and art and collectibles, among myriad other items of value.
Give California Democrats credit for going where even Massachusetts Sen. Elizabeth Warren wouldn’t dare: Her proposed federal wealth tax, a centerpiece of her failed presidential run, began at $50 million. California’s tax is also more punitive than the one proposed earlier this month by Vermont senator and avowed socialist Bernie Sanders. That bill would impose a 60 percent tax on net-wealth profits from March 18 through the end of 2020 — but only on billionaires.
In California, though, sticking it to “the rich” is a state pastime. Two ballot measures passed in 2012 and 2016 raised taxes on incomes starting at $250,000 — not exactly aimed at plutocrats in a state where, in some places, household incomes around $240,000 are still considered “middle class.” California’s next statewide election, in 2022, may include a millionaire’s tax initiative on the ballot.
So why be concerned about one more tax on wealthy Californians? For one, because it’s an idea that’s already been shown to fail. More than a dozen European countries already went down this road and found that a combination of clever asset management, flight abroad and intense lobbying for exemptions meant the levies didn’t generate the hoped-for revenue. As a result, nearly all of these countries eventually ditched their wealth taxes.
Second: One problem with national wealth taxes is the ease with which people can park their assets abroad. The Golden State, however, would be picking fights not only with other countries but also with other U.S. states. The proposed wealth tax would impose levies on citizens for up to a decade after those Californians fled to lower-tax pastures. This would not be a case of governments working across state lines, as one might expect in a manhunt. States such as Nevada, Arizona and Texas take great pleasure in poaching California’s moneyed elite with promises of lower taxes and less bureaucracy. Don’t expect revenuers in Austin or Carson City to do any favors for their counterparts in Sacramento.
A third concern: Who decides actual wealth? Cash is easy to value, but what about farmland or jewelry inherited from grandma? Inevitably, the state and taxpayers are going to arrive at different estimates, and the only guaranteed winners in this scheme will be art appraisers willing to low-ball multimillionares’ Monets. With deep pockets and a lot of money on the line, wealthy Californians could lawyer up and keep the state perpetually tied up in tax litigation — both delaying and lowering anticipated revenues.
With all of these warnings, is the tax likely to be enacted? Democrats enjoy supermajority control of California’s two legislative chambers, so the requisite two-thirds approval is easily doable. Given the state’s massive budget deficit, Gov. Gavin Newsom (D) may be looking at an offer he can’t refuse — not when there’s a rosily estimated multibillion-dollar windfall involved, and not when the tax targets some 30,400 people in a state 1,300 times that large.
Besides, it would be in keeping with this summer’s class-warfare theme in California’s state Capitol. Last month, Democratic legislators also proposed raising California’s top marginal tax rate to upwards of 16.8 percent from 13.3 percent on incomes above $5 million. If that happens, California millionaires would be looking at a total top income tax rate of nearly 54 percent for federal and state taxes.
But California lawmakers may be tempting fate. The state’s revenue system already is overly dependent on millionaires and billionaires: The top 1 percent of taxpayers generate half of personal income tax receipts. And a recent study showed that Californians follow one of two paths when personal taxes go up: They stay and generate less revenue, or they leave.
So if a wealth tax passes, moneyed Californians such as Tesla’s Elon Musk may leave sooner than expected. Others among the affected 30,400 may stay but find clever ways to put themselves below the taxable threshold. Indeed, the Sussexes themselves may fall into this category. Harry entered 2020 worth an estimated $40 million, but after he and Meghan bought their new mansion, now has a reported $9.5 million mortgage to pay off. Add California’s exorbitant cost of living, annual property taxes and upkeep costs on a seven-acre property — all while neither Sussex is gainfully employed — and the couple may soon find themselves conveniently below the $30 million net-wealth demarcation line.
Harry and Meghan showing Californians the way? Our state may be in more trouble than we realize.