California’s Legislature is considering a wealth tax on residents, part-year residents, and any person who spends more than 60 days inside the state’s borders in a single year. Even those who move out of state would continue to be subject to the tax for a decade—a provision that calls to mind the Eagles’ famous “Hotel California” lyric: “You can check out any time you like, but you can never leave.”
The California Constitution probably allows a statewide wealth tax on residents, but any effort to create a tax capable of reaching across state borders is likely to run afoul of the U.S. Constitution. Taxing someone who spends only 60 days in the state in any single year—and extending that tax over an ensuing decade—would be something new under the sun.
Each year this tax net would gather up a new crop of taxpayers for the next decade. The range of people it proposes to ensnare is staggering: every student attending college in California, anyone having a major medical procedure at a California hospital and needing an extended in-state recovery period, and those who spend two months in California away from New York or London winters. Under California tax law, there is no distinction between a nonresident from Minnesota and a nonresident from Dubai.
Assembly Bill 2088 proposes calculating the wealth tax based on current world-wide net worth each Dec. 31. For part-year and temporary residents, the tax would be proportionate based on their number of days in California. The annual tax would be on current net worth and therefore would include wealth earned, inherited or obtained through gifts or estates long before and long after leaving the state.
The proposed wealth tax would fall on a star high-school or college athlete who grows up in California but becomes a wealthy professional in another state after graduation. It would grab a scientist who develops a drug to cure cancer years after leaving California. A grandchild who spent a single summer surfing in Southern California would be subject to the tax. It would include anyone returning home to a foreign country after 60 days in California.
Imagine the child of a Saudi prince being asked to pay a California wealth tax during college and for nine years after graduation.
The authors of the bill estimate the wealth tax will provide Sacramento $7.5 billion in additional revenue every year. Another proposal—to increase the top state income-tax rate to 16.8%—would annually raise another $6.8 billion. Today, California’s wealthiest 1% pay approximately 46% of total state income taxes. Adding the wealth tax to individual taxes and including those taxpayers who have abandoned California, the combination of the two proposals would have 1% of the state’s population paying about 53% of individual taxes.
California has enough financial woes for an entire large nation. Most are of its own making, including unfulfillable public pension promises and a vast social safety net beyond the capacity of California’s workers to fund. So the Legislature looks to the wealthiest Californians to fill funding gaps without considering the constitutionality of the proposals and the ability of people and companies to pick up and leave the state, which news reports suggest they are doing in large numbers. The very act of collecting the financial information necessary to calculate the A.B. 2088 wealth tax would be an invasion of privacy.
Proponents argue that the wealth tax is “only” 0.4% on net worth over $30 million, and the percentage of net worth taxed would decline each year during the 10-year “tail” should a taxpayer leave the state. While the rate appears negligible and the $30 million base seems high, it is a slippery slope. In California, tax rates rarely get lower. The state’s top income-tax rate was 9.3% in 2003. Soon it could be 16.8%. Why 0.4% instead of 1%, 2% or 10%? Why not a $10 million base?
Even at 0.4%, there are eye-popping new levels of actual tax.
would face a first-year tax of approximately $400 million. If he moved out of state immediately, his total wealth tax over the subsequent decade would be another $2 billion. If he remained in California, the wealth tax would extract $4 billion over that decade.
If Bill Gates spent 60 days a year in his Palm Desert home, for each day in California his wealth tax would be more than $1 million. While the tax would diminish each year if he stayed out of the state, he would continue to be subject to a tax on his world-wide net worth for another decade.
The cost of compliance by taxpayers and the cost of enforcement by the state would be monumental. For most taxpayers, the cost of compliance would far exceed the amount of the tax. A resident with a net worth of $31 million would be subject to a wealth tax of $4,000. The cost of an annual appraisal of each of that taxpayer’s assets could easily exceed $100,000. The state would have to hire auditors to chase people all over the world.
As of this moment, there are no police roadblocks on the freeways trying to keep moving trucks from leaving California. If A.B. 2088 becomes law, the state may need to consider placing some.
Mr. Adler is associate professor of accounting at Chapman University.
Copyright ©2020 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8