The Tax Foundation, a nonpartisan nonprofit that produces research on taxes, says the California wealth tax may be far more punitive than the stated 5% on the affluent’s holdings.
As it stands now, a 5% tax on an individual’s worth will be applied if the tax policy is approved. It is structured to be retroactive, so wealthy individuals who are planning to leave the state may still be caught in the tax collector’s net. The thesis is a one-time tax on an individual’s wealth, including unrealized gains, will fund California’s growing budget that operates at a deficit. This does not take into consideration that unrealized gains may change before they are realized. As the Bay Area is home to the world’s most dynamic innovation ecosystem, many prominent investors have already left. More are expected to follow.
According to the Tax Foundation, the draft rule is “poorly written” and could potentially be far more than the stated 5%. The researchers outline 6 potential scenarios as follows:
- Valuation can be based on voting interests in a company when they exceed actual economic stakes.
- Assessment rules for privately held businesses can substantially overvalue them.
- Draconian underpayment penalties for taxpayers and potentially ruinous penalties for their appraisers encourage substantial overstatement of the value of privately held businesses to avoid a dispute with tax authorities.
- Presumptive drafting errors on anti-avoidance rules result in taxing significantly more than the amount of the transfers.
- Provisions regarding spousal assets and indebtedness to relatives would tax a nonresident spouse’s assets and, in the event of a divorce, would tax the California resident on formerly held assets that had been obligated to the ex-spouse in a divorce settlement.
- Deferral regimes have eligibility limitations and impose additional costs, and run the risk of taxing wealth that might no longer exist.
The report includes scenarios that show how the tax could ruin and bankrupt some individuals.
Of course, California would probably need to hire a legion of tax inspectors to sort through all of the tax-related documents.
The Tax Foundation warns that California must “brace for an exodus” of both entrepreneurs and investors.
As has been reported, many have already left, choosing low-tax, business-friendly states like Texas, Florida, and Tennessee.
A wealth tax has been tried in other countries. It has always failed. Innovators and investors make a rational decision to avoid the punishing rules and simply leave. So with the benefit of history and well-known economic theories, why would California seek to pursue such an inane policy? Where wealth, investment, and innovation leave, and taxes raised most likely move lower? It is difficult to understand. California is already home to a bloated state government, which is known for its ineffectiveness, waste, and fraud. I guess they just need more money to fix all of this.
You get the government you elect. Many anticipate that if placed on the ballot, the burdensome tax will pass. In this case, California leadership and its misdirected tax policies will benefit Florida and Texas as money and talent flow in.