Once again, pending legislation seeks to impose a massive tax increase upon all forms of personal property or wealth despite California having the highest income tax rate in the country.
The California Chamber of Commerce has tagged AB 259 (Lee; D-San Jose) and ACA 3 (Lee; D-San Jose) as job killers that will encourage the highest net worth earners in California to leave for states with less punitive tax systems and discourage other entrepreneurs from investing in California innovation, jobs and economy.
In addition, ACA 3 proposes to eliminate the requirement for a two-thirds vote of the Legislature to classify personal property for tax purposes, thus clearing the way for even higher taxes in the future.
New Tax
The measures implicitly acknowledge that rates for existing California income taxes have reached their practical or political maximums, so proponents now propose to devise an entirely new tax never before considered for our state.
Not only is this proposed tax audacious in the amount of new revenue to be raised, estimated by some at $21.6 billion a year, it targets individuals who may have only a fleeting connection with the state — reaching across time and space to seize revenues from successful entrepreneurs and business owners.
These individuals have played a large role in driving California’s budget growth and providing the shock-absorbing revenue surpluses that the state will use to offset today’s revenue shortfalls.
Constitutional Amendment
ACA 3 proposes that the people of California amend the Constitution to authorize the Legislature to impose a tax upon all forms of personal property or wealth, whether tangible or intangible. The new tax would be administered and collected by the Franchise Tax Board (FTB) and the Department of Justice.
ACA 3 also in effect repeals the State Appropriations Limit law, which applies some discipline to legislative spending and has kept taxes within some reasonable and knowable bounds.
Annual Tax
AB 259, if adopted, imposes an annual tax beginning on or after January 1, 2024, and before January 1, 2026 at a rate of 1.5% of a 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.
After January 1, 2026, a tax of 1% upon the worldwide net worth of every resident in this state in excess of $25 million (for married taxpayers filing separately) or $50 million for all other taxpayers in 2026. Worldwide net worth would not include any real property directly held by the taxpayer (but would include indirectly held real property). There would be an additional 0.5% surtax upon worldwide net worth in excess of $500 million for married taxpayers filing separately and $1 billion for all other taxpayers.
Worldwide net worth would be calculated in the manner set forth for calculating the federal estate tax under the Internal Revenue Code and would be the value of all worldwide property owned by the taxpayer on December 31 of each year. The FTB would be authorized to adopt regulations to prevent the avoidance or evasion of the wealth tax.
Harm to Tax Climate
California ranks 48th on the Tax Foundation’s 2023 State Business Tax Climate Index. California already has the highest income tax rate in the country (13.3%) while Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming do not impose any income tax.
In addition, California has the highest sales tax rate and gas tax rate in the United States.
The top 5% of California income earners pay 70% of the total personal income tax (PIT) revenue. Losing any of these taxpayers and the revenue they contribute to the state could harm California’s General Fund. Thus, these bills will plausibly achieve the exact opposite of their stated intent and drive the state’s money away rather than redistributing it.
Furthermore, AB 259 will facilitate nuisance lawsuits under the guise of tax enforcement, create conflicts with existing tax law, and lead to double jeopardy for taxpayers.
California’s elected leaders are facing the first revenue shortfalls since the Brown administration. The very last thing the Legislature should be doing is signaling to the most productive and prolific taxpayers in the state that they should consider taking their investments, energy, innovation and tax payments elsewhere.
