California Democrats Consider Estate Tax — Including People Who Moved Out of State

California lawmakers are pushing legislation that would impose a new tax on the state’s wealthiest residents — even if they’ve already moved to another part of the country.

Rep. Alex Lee, a progressive Democrat, last week introduced a bill in the California State Legislature that would impose an additional 1.5 percent annual tax on those with a “worldwide net worth” of more than $1 billion, starting as early as January 2024.

As early as 2026, the tax threshold will be lowered: those with a global net worth of more than $50 million will be hit with an annual wealth tax of 1%, while billionaires will still be taxed at 1.5%.

Global wealth extends beyond annual income to include diverse holdings such as agricultural assets, art and other collectibles, as well as stocks and hedge fund interests.

The legislation is a modified version of an estate tax passed in the California Assembly in 2020 that the Democratic-led state Senate refused to pass.

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The current version just introduced includes measures that allow California to levy property taxes on residents even years after they’ve left the state and moved elsewhere.

Exit taxes are not new to California. But that bill also includes provisions to create contractual claims attached to the assets of a wealthy taxpayer who doesn’t have the cash to pay his annual estate tax bill because most of his assets don’t turn easily into cash. This claim would require the taxpayer to file annual returns with the California Franchise Tax Board and eventually pay the property taxes owed, even if they have moved to another state.

California was one of several blue states last week to introduce bills to impose new property taxes. The other states were Connecticut, Hawaii, Illinois, Maryland, Minnesota, New York and Washington. Each state’s proposal contained a different tax approach, but all focused on the same basic idea: the rich should pay more.

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Lee’s office did not respond to a request for comment for this story. However, he has made public statements that echo the message that wealthier residents should pay higher taxes.

“The working class has borne the tax burden for too long,” Lee said he tweeted. “The ultra-rich pay little to nothing by hoarding their wealth through assets. Time for this to end.”

According to Lee, the tax would affect 0.1 percent of California households and generate an additional $21.6 billion in state revenue, which would go into the state’s general fund. California has some of the highest taxes of any state in the country.

Supporters argue the money could boost funding for schools, housing and other social programs. Perhaps more importantly, however, Lee hopes it could help address California’s massive $22.5 billion budget deficit.

Meta's headquarters are located in Menlo Park, California on November 9, 2022.
A wealth tax could be disastrous since the owners of promising businesses could be taxed with an estimated business value of hundreds of millions of dollars.
AFP via Getty Images

“That way we can continue to address our fiscal issues,” he told the Los Angeles Times. “Basically, we could plug the whole hole.”

However, experts argue that the bill will have the exact opposite effect through high administrative costs and causing people to flee the state.

“It brings significant administrative challenges in terms of asset and liability valuation, high and distorting effective interest rates, among other problems that make it an inefficient source of revenue,” Gordon Gray, director of fiscal policy at the American Action Forum, told Fox New Digital.

Others echoed that point, also arguing that a new estate tax would likely drive many wealthy residents out of California.

“California’s proposed estate tax would be financially devastating, difficult to administer and drive many wealthy residents — and all their current tax payments — out of state,” Jared Walczak, vice president of state projects at the Tax Foundation, told Fox News Digital. “The bill sets aside as much as $660 million annually for administrative costs alone, more than $40,000 per prospective taxpayer, giving an idea of ​​how difficult such a tax would be to impose.”

People are already moving from high-tax states to low-tax states, according to a recent analysis by James Doty, president emeritus and professor of economics at Chapman University. It found that the 10 highest-tax states lost nearly 1 in 100 residents in net domestic migration between July 2021 and July 2022, while the 10 lowest-tax states gained nearly 1 in 100.

California lawmakers pushing the estate tax believe they can “get around” the problem of residents leaving by “trying to tax people even after they leave the state,” said Patrick Gleason, vice president of state affairs at Americans for Tax Reform . However, he, Gray and Walczak have questioned the legality of such an approach or called it outright unconstitutional.

Previous studies have shown that the top 1% of taxpayers pay about 50% of state income taxes in New York, California and elsewhere, raising the question of how damaging a mass exodus of wealthy residents could be to tax revenues.

Walczak noted that an estate tax would be particularly problematic for California, joking that the people most excited about such a law should be people in Texas, where some high-profile Californians have relocated in recent years.

“The estate tax could be particularly devastating in California, home to so many tech startups, because owners of promising businesses could be taxed with hundreds of millions of dollars in estimated business value that never materialize,” Walczak said. “Very few taxpayers would incur property taxes, but many taxpayers would pay the price. The only people who should really love a property tax in California are those who work in the Texas economic development office.”

However, some proponents of wealth taxes argue that they are necessary to combat economic inequality.

Maryland Democratic Representative Jheanelle K. Wilkins, for example, proposed a bill to make families owe taxes on inheritances over $1 million instead of $5 million, as is the case today. He said such ideas would now gain more support after the COVID-19 pandemic exposed the disparity between rich and poor.

“That’s a lot of money we’re leaving on the table,” he told the Washington Post.

Other advocates say property taxes are low and the wealthy can afford them. But experts note that because interest rates refer to net worth, not income, they have an exaggerated effect.

Walczak explained the point in a recent blog post, using as an example a $50 million investment, held for 10 years and earning a 10% nominal annual return in an environment of 3% annual inflation. Excluding estate tax, this investment would yield $46.5 million in investment returns, in current dollars, after 10 years. With a 1% estate tax, however, it would return $37.3 million, wiping out nearly 20% of the profits.

Wealth taxes “profoundly reduce investment returns, to the detriment of the broader economy,” Walczak wrote. “Average taxpayers may not care if the ultra-rich have a lower net worth. But they will certainly care if innovation slows and investment declines.”