California Proposes “Savings” Tax Again in 2022
After 2 failed tax bills in 2020 and 2021, California legislators are again proposing a tax bill that would target the wealthy. California Assembly Bill 2289 would impose a “wealth tax” on billionaires and some eligible millionaires, making California the first state to impose a “savings” tax, although Washington is also considering a similar proposal. The tax would apply to assets and all wealth, or “worldwide net worth”, whether or not it has been realized as income. The bill would impose a 1% tax on individuals with a net worth of at least $50 million, and a 1.5% tax on those worth over $1 billion. In California, this would affect 0.07% of taxpayers, or approximately 15,000 residents.
If passed, the bill would go into effect for billionaires in 2023 and for millionaires in 2025. However, the likelihood of the bill passing seems low, as previous similar bills have been unsuccessful, and the proposal requires voter approval of a constitutional amendment to exceed California’s tax rate limits of 0.4%.
Supporters say that this type of tax is needed in California, the state with the largest portion of the nation’s billionaires, as well as the highest poverty rate. However, even with a Democratic supermajority in the legislature, the wealth tax faces high criticism.
California already has a progressive tax structure that relies on the wealthiest residents disproportionately. Additionally, taxing assets rather than income introduces many new complications and valuations that may expand beyond the borders of California. In addition to the complexities of declaring all assets every year, valuing certain assets could prove to be exceedingly difficult. Percentage interests in legal entities like hedge funds and partnerships would have to be considered, as well as interests in businesses, inside or outside of California. According to the bill, worldwide net worth shall include the value of real property or out-of-state tangible property held indirectly via legal form, such as corporation, LLC, trust, or partnership.
Critics also point out that the bill would simply encourage the wealthy to relocate outside of California, reducing state revenue overall. Robert Gutierrez, President of the California Taxpayers Association, explains that “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. 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.”
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