Could the California Wealth & Exit Tax (aka ‘Billionaire Tax’) Affect the Rest of Us?

Legislators in California aren’t afraid to attempt a long shot when it comes to proposing new tax bills on the wealthy. Their latest bid—dubbed the billionaire tax—would raise state revenues based on the world-wide portfolios of the ultra-rich and assess taxes for 10 years for those who move out of California. A plethora of states are more than willing to welcome them—and their businesses—with open arms, but what does it mean for the rest of us?

Wealth Tax Bills Across the Nation

After yet another quick flip for California from budget excess in 2022 to deficit in 2023, California state Assembly member Alex Lee presented Assembly Bill 259 (AB-259) on January 19, 2023, as a way to wipe out the deficit, coordinating its introduction with wealth taxation bills proposed across 8 states on the same date.
Connecticut, Illinois, Maryland, Hawaii, Washington, New York, and Nevada joined California in announcing various plans to increase state tax rates and assessments on billionaires—and in many cases, millionaires. Several states (such as Massachusetts) have already implemented similar tax rate increases for those that earn over $1 million in annual income.

California’s Aggressive Stance

With 60% of U.S. billionaires residing in California, it’s not surprising that state representatives have turned to the mega-wealthy to resolve the state’s deficit issues. Long seen as having the means to evade or greatly reduce their own tax burden, resentment seems just as much a part of the bill as the desire to meet the state’s civil and infrastructure obligations.

AB-259 will undoubtedly face court challenges—should the bill pass successfully through the legislative hurdles and the state-wide public voting process needed to amend their state constitution (ACA3). The proposed wealth and exit tax bill includes a 1% tax on extreme wealth over $50 million and 1.5% on wealth in excess of $1 billion. It requires an amendment to remove the California constitutional limit of a 0.4% tax rate on personal property. ACA3 would also increase the scope of what is defined as personal property and shift the power to make limit determinations to elected and public officials.

Legal and Administrative Concerns of AB-259

Equitable tax liability distribution is at the core of AB-259, but it hints of being a discriminatory practice. The bill’s proponents report that the top 0.1% —23,000 households—would be subject to the wealth and exit taxes and that it would generate an estimated $21.6 billion annually. Others would be left unburdened by this tax assessment.

The bill may also infringe on interstate commerce and Federal due process laws as it intends to tax income and wealth earned beyond its borders. It could also be seen as an impediment to a resident’s ability to freely move between states. The exit tax is meant to circumvent the strategy of moving to more wealth-friendly states with lower—or no—income or wealth tax.

While identifying those subject to the tax is an easy task, implementing the needed process is another matter. California’s Franchise Tax Board would need to design and document filing and valuation guidelines, complete audits of filed and unfiled tax obligations, and face repeated legal challenges from those who steadfastly choose not to cooperate. Given the huge sums of money at stake, spending some of it on the administrative upkeep of the program would be anticipated and just a small fraction of the gains expected to be headed to the state coffers.

What it All Means

Billion-dollar tech giants, movie and runway stars easily have reason to be concerned about California’s Wealth and Exit Tax legislation, but more than likely—they’re not. They have people to deal with it.

For those seeing the trend of Wealth taxes—and California’s Wealth and Exit Tax in particular—the more pervasive risk to the general population is that of the unknown ways legislative changes could affect everyone from mid-level executives to line employees.

Whether directly impacted or used as a precedent, the dynamic shifts in tax policy, administrative, and legal changes could open a floodgate of alternatives that previously didn’t need to be considered.

If—or when—a California exodus occurs, out-migrators will likely take their families, employees, and investments out of the state as well. Behavior changes by those who remain should be monitored for shifts in wealth-earning opportunities, decreased involvement in the employment sector, and other tax strategy behaviors that may affect business partners, bankers, investors, and certainly working-class Californians.

Evaluating a Potential Move? Read more.

REDW’s trusted state and local tax advisors are identifying top considerations for those who may move states as part of a tax minimization strategy—regardless of which income bracket you fall into.

Strategic Guidance You Can Trust

Speculating on the success or failure of AB-259 is easy to do, but dissecting the broader implications to State and Local taxpayers around the country is much more nuanced. The REDW State and Local Tax (SALT) team maintains expertise across states and is plugged in to trends and legislation that may affect you.