Several Democratic-led states have introduced legislation to further increase taxes on the rich.
The state’s legislators are attempting to approve a law that would impose a new tax on the wealthiest residents of California regardless of where they now reside.
Liberal Democrat Alex Lee of California introduced a bill last week that would put a 1.5% tax on anybody with a “global net worth” over $1 billion, effective in January 2024.
People with a worldwide net worth of more than $50 million will be subject to a 1% annual wealth tax beginning in 2026, while billionaires will continue to be taxed at 1.5%.
Real estate, works of art, equities, and even a stake in a hedge fund can all contribute to one’s net worth.
The California Assembly enacted a wealth tax in 2020, but the Democratic-controlled state Senate has yet to take up the modified version of the bill.
The most current proposal contains language that would let California collect wealth taxes from former residents who have moved overseas.
Exit fees are sound knowledge in California. To help wealthy taxpayers who can’t liquidate assets to meet their yearly wealth tax due, the proposal also includes mechanisms for creating contractual claims tied to such investments. Even if the taxpayer moves out of state, they are still responsible for filing yearly reports and paying outstanding wealth taxes to the California Franchise Tax Board.
The Golden State has joined five other blue states in introducing new wealth tax laws. The remaining states are Connecticut, Hawaii, Illinois, Maryland, Minnesota, New York, and Washington. Different states’ proposals had somewhat different approaches to raising revenue, but they all agreed that higher rates for the rich were essential.
Lee’s office did not respond to a request for comment on this article. His public statements, however, give the impression that he supports higher taxes on the wealthy.
Working people “have carried the tax weight for far too long,” Lee tweeted. No more of this “the rich pay no taxes because they can conceal their money in assets” nonsense.
Lee predicts that the tax would hit 0.01% of California households, generating $21.6 billion in additional revenue for the state. California has some of the highest tax rates in the country.
Its backers argue that the money might be put to greater use in public services like healthcare, education, and housing. Lee thinks it can narrow the $22.5 billion funding shortfall facing California.
He told the Los Angeles Times, “this is how we can keep fighting our fiscal difficulties.” The entire hole might be closed off if necessary.
Analysts, however, argue that the policy will have the opposite effect, leading to massive administrative costs and a mass migration of people from the state.
“it brings significant administrative challenges concerning asset and liability valuation, high and distortionary effective rates, among other problems that make it an inefficient revenue source,” said Gordon Gray, director of fiscal policy at the American Action Forum, in an interview with Fox New Digital.
Some have speculated that many of California’s wealthy would leave the state if a new wealth tax were implemented.
Because of the complexity of such a tax, the law sets aside up to $660 million annually for administrative expenditures, or more than $40,000 per potential taxpayer. “The proposed California wealth tax would be economically devastating, hard to administer, and would drive many rich citizens — and all their present tax payments — out of state,” said Jared Walczak, vice president of state programs at Tax Foundation, in an interview with Fox News Digital.
James Doti, president emeritus and economics professor at Chapman University, recently conducted research showing that between July 2021 and July 2022, roughly 1 in 100 persons moved from the 10 states with the highest taxes to the 10 states with the lowest taxes due to net internal migration.
Patrick Gleason, vice president of state relations at Americans for Tax Reform, claims that proponents of a wealth tax in California think they can “get around” the exodus of residents by “trying to charge individuals even after they leave the state.” However, Gleason, Gray, and Walczak all express skepticism about whether or not this is a constitutional strategy.
Research shows that the top one percent of taxpayers in places like New York and California pay more than half of all state income taxes, raising concerns about the impact of a hypothetical mass exodus of the wealthy on tax revenues.
Walczak remarked that Texans, to whom some notable Californians have emigrated in recent years, would benefit the most from such a policy, even though a wealth tax would be problematic everywhere.
Since the owners of profitable businesses might be taxed hundreds of millions of dollars worth of expected economic value that never materializes, “a wealth tax may be particularly damaging in California, home to so many digital companies,” claims Walczak. Only those working for the Texas Economic Development Office can morally argue favor of a California wealth tax.
On the other hand, those who advocate for wealth taxes argue that they are necessary to provide a fair playing field in the economy.
For instance, Maryland Democrat Delegate Jheanelle K. Wilkins has proposed legislation to lower the current threshold for inheritance taxation from $5 million to $1 million. She predicted that such legislation would gain enormous popularity after the COVID-19 outbreak revealed income disparity between the rich and the poor.
That’s a good chunk of dough we’re leaving on the table, she told the Washington Post.
Some may counter that the affluent can easily afford these low rates, but experts note that because the taxes are levied on a person’s wealth rather than their salary, they have a disproportionate effect.
Walczak recently blogged about this concept, illustrating it with the following scenario: a $50 million investment generates a 10% nominal rate of return in an environment of 3% annual inflation. Without a wealth tax, the investment would return $46.5 million after ten years. With a 1% wealth tax, however, it would generate $37.3 million, wiping away over 20% of the gains.
While the typical taxpayer might not care if the ultra-rich have lesser net worths, Walczak argues that wealth taxes “severely impair” investment returns and harm the economy as a whole. However, these individuals will take the resulting decline in innovation and investment seriously.