Will a Wealth Tax Make California’s Wealthy Flee?

Written by Landlord Property Management Magazine on . Posted in Blog, Uncategorized

Will a Wealth Tax Make California’s Wealthy Flee?

By Edward Ring
August 25, 2020

If you’re rich, there aren’t too many places on earth better than California to live. Sure, there are the perennial earthquakes and wildfires, but those are more than made up for by the Mediterranean climate and the scenic splendor; the Pacific Shore, the High Sierra. And apart from these natural disasters, nothing is wrong with California that money can’t cure.

If you’re a billionaire, then California’s punitive cost-of-living and its failed public schools are of no concern. The moneyed liberal patricians of California, from Tom Steyer to Jack Dorsey, have options. Who cares if your mega-mansion costs $12 million instead of $1.2 million, if you’re a billionaire? Who cares if the local public school is a war zone, if you can easily afford to send your children to the finest private school money can buy?

This is why a recent column in the Los Angeles Times by Nicholas Goldberg, claiming that raising taxes on the wealthy will not drive the wealthy out of California, has some credibility. Goldberg writes:

“Sure, there are lower-tax states where Californians could go. Nevada, Texas, Florida, Alaska, South Dakota, for example. But do we really think many Silicon Valley billionaires — or millionaires — are going to pack up for South Dakota to avoid Miguel Santiago’s income tax surcharge? Do people in Bel-Air or Venice want to move to Dallas?”

Recent events shall put Goldberg’s theory to the test.

California’s overall tax burden is the highest in America, and there’s no end in sight. In the wake of the Great Recession, either California voters, or the state legislature, approved an assortment of new state taxes. In 2012 voters approved an increase to the state income tax rate on wealthy households, a measure that pours up to $9 billion per year into state coffers. In 2017 California’s legislature passed a 12 cent per gallon increase to the gas tax, which brings in $5 billion per year. Also in 2017, California’s state legislature imposed a sales tax on internet purchases, bringing in up to $2 billion per year. Starting in 2013, California’s “cap-and-trade” auctions began yielding significant returns to the state; over $13 billion through June 2020. And to ensure the potheads pay their fair share, the voter-approved 2018 recreational marijuana initiative is already bringing in well over $1 billion per year.

That’s a lot of new taxes, but that was then. What about now? What about the COVID Recession? How will California’s lawmakers cope with what is – despite all the new taxes – a projected $54 billion state deficit for the 2020-21 fiscal year?

Desperate times call for desperate measures, and through a combination of cut-backs, borrowing, payment deferrals, and tweaks to the tax code (suspending net operating loss deductions, putting a ceiling on tax credits), California’s budget bureaucrats have cobbled together a precariously balanced plan. But more taxes are an essential part of their plan. Lots more taxes.

Backers of new taxes never have problems putting initiatives onto California’s state ballot. If the tax-hungry legislature doesn’t do it, the cash-rich public sector unions will pay for professional signature gathering, and in either case, they’ll fund the subsequent campaign. Teed up for November 2020 are two tax measures. Prop. 15 will eliminate the last advantage small businesses have in California, by forcing commercial properties to be reassessed at current market values to calculate their property taxes. Prop. 15 is projected to bring in over $12 billion per year for the state. Prop. 19 will trigger reassessments of inherited homes unless the heirs intend to live in them.

Will these initiatives pass? That’s anybody’s guess. Californians may expect proponents to spend tens of millions to saturate the airwaves and internet. Expect a yes vote to be “for the children,” or, for California’s burgeoning Spanish speaking populace, “para los ninos inocentes.”

But ballot initiatives are only necessary if they overturn restrictions on taxes that were enacted via ballot initiatives. The California state legislature isn’t just waiting for the voters to weigh in on new taxes, they’ve also got tax proposals that they can enact all by themselves.

Which brings us to two proposed tax increases that are working their way through the California state legislature. Assembly Bill 1253 would impose “three new surcharges on the state’s highest earners: 1% for taxable incomes over $1 million, 3% for incomes over $2 million and 3.5% for incomes over $5 million, meaning California’s wealthiest could pay 16.8% on their taxable income.” The tax is expected to generate over $7 billion per year.

Where Pocahontas Stumbled, California’s Legislature Dares to Tread

And since innovation in California isn’t limited to software and chips, leave it to the California state legislature to propose the nation’s first “wealth tax.” Assembly Bill 2088, if enacted, will impose, year after year, an annual tax at a rate of 0.4 percent of any California resident’s net worth in excess of $30 million. This bill has to be read to be believed.

First of all, the calculation of net worth, particularly for wealthy people, is not a simple matter, nor is it an exact science. Have a look at the categories of the “assets to be reported” that AB 2088 includes (but “is not limited to”):

(1) Stock in any publicly and privately traded C-corporation.
(2) Stock in any S-corporation.
(3) Interests in any partnership.
(4) Interests in any private equity or hedge fund.
(5) Interests in any other noncorporate businesses.
(6) Bonds and interest-bearing savings accounts.
(7) Cash and deposits.
(8) Farm assets.
(9) Interest in mutual funds or index funds.
(10) Put and call options.
(11) Futures contracts.
(12) Art and collectibles.
(13) Financial assets held offshore.
(14) Pension funds.
(15) Other assets, excluding real property.
(16) Debts other than mortgages or other liabilities secured by real property.
(17) Real property.
(18) Mortgages and other liabilities secured by real property.

Go ahead. Explain how “privately traded C corporation” stock will be reliably valued, and not subject to audit, possibly a targeted audit by a hostile prosecutor? Ditto for S-Corps, private partnerships, private equity, hedge funds, and any “other noncorporate businesses.” What about “put and call options,” and “futures contracts,” the value of which fluctuates constantly? “Art and collectibles?” Are they kidding?

It gets worse. Unrealized income? Pay the tax, or, per holding, “elect for an unliquidated and deferred tax liability,” “backed by a contract with the state specifying the reference for the eventual valuation of the unliquidated and deferred tax liability.” Collateralized assets? Pay the tax but don’t deduct the amount borrowed against them. Because somehow that’s fair.

Then there’s the amazingly byzantine provisions for determining residency. For full-time residents, it’s easy. But what if you live in the state part of the time? No problem. Whatever percentage of time you live in the state shall be applied to your tax rate. Half the time, pay half-the tax. But let’s not oversimplify this tangled mess. If you enter the state of California for only 60 days in any given year, then for that year, you shall pay 60/365 of your worldwide net worth to the State of California, and so on.

Perhaps all of this might induce someone to permanently leave California, despite the unforgettable alpine meadows and breathtaking ocean sunsets. No problem. The super-rich may leave California, but California won’t leave them. In year one of their exile, they’ll still pay 90 percent of the 0.4 percent wealth tax. In year two: 80 percent. Year three: 70 percent. It will take a decade before the long arm of California’s Franchise Tax Board lets go. And then of course if in any one of those years a wealthy exile might venture back into the Golden State for more than 60 days, tack that onto whatever else is owed.

To do justice to the entirety of this law’s grasping, arrogant complexity would take thousands of words of analysis by tax experts, and it is a certainty that expert interpretations will vary. But nobody ought to be surprised if AB 2088 is passed into law. And if the Democrats end up controlling the executive and legislative branches of the federal government with the same death grip with which they control California politics, don’t be surprised to see a federal wealth tax, along with copycat laws in every Democrat-controlled state.

This insatiable desire for more taxes is caused by an insatiable desire on the part of government bureaucrats to not just bail out a bloated and nearly bankrupt government, but to expand government even further. But most of California’s wealthiest citizens are supporters if not actual beneficiaries of expanding government. Will the sheer arbitrary nature of a wealth tax, the time and perpetual risk that will come with it, matter more than the actual expense? Will they leave?

Maybe not. Maybe Nicholas Goldberg is right, and California is simply too beautiful to drive away super-rich people who can easily handle the additional financial burden. But in general, high taxes and over-regulation have a way of trickling down to those who can least afford to pay them, in the form of a higher cost-of-living. It is no coincidence that California not only has the highest taxes in America, but also the highest cost-of-living. Along with the direct and obvious burden to low and middle-income Californians of sales tax and other regressive taxes, California’s businesses pay punitive taxes and fees and regulatory costs which are necessarily passed on to the consumer, whether it’s in the price of a home, or utilities, or products and services.

California’s legislature may justify a wealth tax as only affecting people who are so wealthy they don’t deserve sympathy. But in a state as big and broke as California, $7 billion per year is not enough. The wealth tax for the super-rich is the foot in the door. The next target will be the “privileged” middle class.

AB 2088, the wealth tax, is a blueprint for oppressive, mind-numbing tyranny, obfuscated within an impenetrable slop of bureaucratese, written by barely numerate, financially and economically indifferent ideologues. The only thing more shocking than their unquenched lust for money and power is the fact that they’ve already gorged on both for so long one would think that by now they would have been overcome by their own obesity. No such luck. Not a chance. Sacramento’s capitol creatures are hearty trencherman indeed. For all practical purposes, their stomach capacity is infinite.

Watch out, America. Where Pocahontas stumbled, and Crazy Bernie faltered, California’s woke state legislature is stepping up. And if these Californian politicians have proven anything, it’s that their appetite for more, more, more, shall not abate. Once they’ve eaten the rich, they’re going to eat you.