The California Legislature is considering a new Wealth and Exit Tax to combat a $68 billion deficit. This proposed bill raises many questions, from legalities to what it could mean for Californians’ future.
The highest taxes in the U.S.
California’s top income tax rate has been 13.3% for the past ten years. As of January 1, 2024, it was increased to 14.4% for those earning over $1 million primarily through salary. The next step could likely be an “Exit Tax” for those who want to relocate to avoid high taxes.
Eat the rich
The proposed tax bill would not affect Californians whose net worth is under $50 million. Assembly Bill 259, known as the California Wealth and Exit Tax, is penned to protect the Golden State from the loss of taxes resulting from the departure of companies and individuals and to recover some of the state tax breaks, benefits, infrastructure support, etc. that were to them as stimuli to move to or stay in the state.
The bill could expand
Before we dive deeper into the implications of the so-called Exit Tax, Assembly Bill 2088, introduced in 2020, could expand to tax non-residents who earn over $30 million in the Golden State. This could bring more devastating news to landowners and entrepreneurs in California.
Questioning legality
The bill’s so-called Exit Tax was created to close a loophole in capital gains tax. Previously, people could avoid paying taxes on capital profits by moving out of California before selling assets like stocks. The exit tax ensures these gains are taxed, regardless of where the person lives.
Further legalities
The bill is unlikely to pass, primarily due to Governor Newsom’s opposition. However, it raises many questions for the future, mainly when cases like Moore vs. the U.S. test the constitutionality of the Mandatory Repatriation Tax (MRT). The Moore decision will primarily affect federal income tax, and SCOTUS’s decision is expended this spring.
Impact on the state of California
Discussing the bill raised concerns not only for high earners but also for other economic areas in the state. It could lead to a decline in property values, which could cause trouble for less-than-rich Californians down the line. ABA or American Bar Association asked, “Can One Ever Actually Leave the Sunshine State?”
Targeting the wealthy
John Williams outlined in his YouTube video that some states could use the California model to tax the wealthy. Recent taxation changes made Hawaii the second most expensive state for the ultra-wealthy, followed by New York, New Jersey, D.C., and more. Some speculate that cities like Philadelphia or Chicago could quickly adopt this model.
Freedom of movement?
Under Williams’ video, one person wrote, “I think they should check case law: The U.S. Supreme Court in Crandall v. Nevada, 73 U.S. 35 (1868) declared that freedom of movement is a fundamental right and therefore a state cannot inhibit people from leaving the state by taxing them.” Others also wondered about the legal side of the proposed bill.
Is it unconstitutional?
Another argued, “Taxing people for leaving C.A.? That is unconstitutional. Citizens of the United States have the liberty to freely move in and out of the 50 states as they please. People need to bring this to the Supreme Court and sue C.A. for its stupidity!”
Questions about California’s future
Someone asked, “The problem with owning an expensive piece of property is who do you sell it to? What rich person will buy your house knowing about this law? This looks like extortion to me.”
Leaving the Golden State
Moneywise recently reported that wealthy Americans are leaving California en masse, adding that the state has under 36 million residents, the lowest number since 2015. The Los Angeles Times also reported that the wealthiest are leaving the state, which will adversely affect the economy, they stated.
Businesses are also fleeing
Since 2005, nearly half of the companies that left California have moved to Texas. Governor Abbott declared his state the “headquarters of headquarters” since more Fortune 500 companies are located in Texas than in any other state. The California Policy Center found that 237 companies have left California since 2005.
