California Proposes New Kind of Wealth Tax

by | Aug 31, 2020 | Wealth Management


California has a long history of starting trends and new fads. One trend that has been growing has been the idea of extra taxes on the wealthy and Rob Bonta (D-Oakland) and others have proposed a new tax on the wealthy that we have not seen before. The tax would be based on a taxpayer’s net worth (not income) and applied annually.

Wealth Tax Basics

The new tax rate of 0.4% would be applied to an individual or joint filer on all net worth that exceeds $30 million. A couple that files married, separate would have a threshold of $15 million. This new legislation is expected to impact about 30,400 Californians. As an example, an individual that has a net worth of $38 million would owe approximately an additional $32,000 in taxes (($38 million – $30 million) * 0.4%).

What Assets Are Included?

This calculation includes 18 categories of all assets held globally (not just in CA) including real estate, closely-held businesses, offshore assets, pension assets, business interests, and collectibles like art. Hard to value assets (i.e. businesses) will be allowed to have a deferred tax liability attached to them. This is sure to create tremendous challenges.

Do Not Think You Can Just Leave

In an unprecedented move, the bill also wants to charge individuals that leave this state this wealth tax for ten years after they leave on a phaseout schedule. For example, an individual subject to this tax leaves CA and goes to Texas, the bill proposes they would be subject to this tax at 90% the first year and each subsequent year at a diminishing rate.

Logistical Nightmare

This bill will create many challenges. First, how do you value certain illiquid assets and what discounts can be applied?  It is safe to assume individuals and the state will have different estimates.

Secondly, it would be safe to expect other states that have benefited from California’s prior missteps like Nevada, Arizona, and Texas to use this to their advantage to attract new desired residents. They probably would not play nice with California as well to help them enforce this law. This would damage California’s relationships with other states and countries as they pick fights and try to enforce this.

There would be much litigation involved on all sides and this law would be tied up in court for years delaying any potential tax revenues and draining financial resources in the process.

Will This Become Law? This is hard to answer given the supermajority in California. We have seen similar ideas like this from Senator Warren Elizabeth fail in the past. Several European countries have also tried to enforce a law like this and every time they eventually scrapped it due to clever asset management, lawsuits, and people moving abroad. This law feels ill-timed but given financial constraints in California it may become law.

What we do know is that if this does come to fruition it will fundamentally change asset and financial planning for many individuals.

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