California Millionaires Tax and Wealth Tax
California is struggling right now. The coronavirus pandemic has triggered economic collapse for many – the unemployment rate is nearly 15%, small businesses are closing left and right, and renters are unable to pay their landlords. On top of that, fires are raging throughout the state, with upwards of one million acres scorched with no end on sight. As the coronavirus pandemic and fires hammer the economy, California still faces a $54.3 billion deficit, the state’s worst budget gap since the Great Recession.
To mitigate the massive debt at a time when the state desperately needs funds, California Legislators have proposed two new controversial bills:
AB 1253 is a proposed “millionaire tax” that would increase taxes for high earners to pay for a variety of benefits and services, particularly for Californians directly impacted by COVID-19. Tax increases under this bill would be tiered at 1% on income above $1 million, 3% on income above $2 million, and 3.5% on income above $5 million. California’s current top tax rate is 13.3%, and were the bill to become law, the top rate would become 16.8%. About 70,000 taxpayers would be impacted by this bill, or 0.5% of those who filed tax returns in 2018.
AB 2088 is a proposed “wealth tax” that is not a tax based on income earned, but on the world-wide wealth of the taxpayer itself. If passed, AB 2088 would establish a 0.4% tax rate on all net worth above $30 million for a single tax-payer, or $15 million for married taxpayers filing separately. The tax would be applied to the net worth of about 30,400 Californians, raising approximately $7.5 billion annually.
People subject to the wealth tax would report it to the Franchise Tax Board along with their income taxes. They would have to report all assets including stock in publicly and privately traded corporations; interests in partnerships, private equity or hedge funds; cash, bonds and savings accounts; mutual funds, futures and options; art and collectibles; offshore financial assets, pension funds, non-mortgage debt, real property and mortgage debt. Directly held real property would be exempted from the wealth tax because it’s already subject to property tax at a higher rate.
If you think this proposed wealth tax would cause a mass exodus of the wealthy from California, you are not alone. Legislators added an unusual twist to preemptively address a potential withdrawal of the wealthy from the state – the tax would apply to former residents of California for 10 years. As proposed, AB 2088 would tax former Californians 90% of their in-state levy in the first year after they leave the state, 80% in the second year until phasing out completely over a decade.
While both of these bills are controversial, the fact remains that the coronavirus pandemic is deepening the economic inequality in California. The pandemic has seen millions of Californians without jobs, food, or money for next month’s rent, yet billionaires have seen their net worth jump 25% during the coronavirus pandemic. Both bills are still pending and require a ⅔ vote of both houses of the Legislature in order to reach Governor Newsom’s desk. Considering time constraints caused by coronavirus on the Capitol, we may not see a vote on either bill until 2021.