California’s Wealth Tax Being Debated Today? What’s Your Opinion?

There’s no debate that California has a major budget deficit. Governor Newsom proposed a $291B budget for 2024-25 to help with a shortfall reported from between $40 and $68 Billion.

This so-called Wealth Tax law is scheduled to be heard in legislative session in the Assembly Revenue and Taxation Committee on January 10, 2024. AB 259 would institute a 1% tax on the net worth of residents with more than $50 million in assets, with a 1.5% bracket for those with more than $1 billion. The current top income tax rate, levied on millionaires, is 13.3%

A 2022 analysis from the author of AB 259, Assembly member Alex Lee, showed the bill’s initial phase, which would apply only to the state’s billionaires — there were about 170 at the time — could raise about $10.6 billion during the first year.

What do you think of the proposed law, whether it will personally affect you or not? Comment below, or start a new conversation with your neighbors on the Forum.

Click this red link to read the full text of the proposed “Wealth Tax” law, AB 259

Here’s a Summary of Important Provisions of AB 259

AB 259 would impose an annual tax beginning on or after January 1, 2024, and before January 1, 2026 at a rate of 1.5% of a resident’s worldwide net worth in excess of $1 billion or in excess of $500 million in the case of a married taxpayer filing separately.

After January 1, 2026, a tax of 1% would be levied upon the worldwide net worth of every resident in this state in excess of $25 million (for married taxpayers filing separately) or $50 million for all other taxpayers. Worldwide net worth would not include any real property directly held by the taxpayer (but would include indirectly held real property).

There would be an additional 0.5% surtax upon worldwide net worth in excess of $500 million for married taxpayers filing separately and $1 billion for all other taxpayers. Worldwide net worth would be calculated in the manner set forth for calculating the federal estate tax under the Internal Revenue Code and would be the value of all worldwide property owned by the taxpayer on December 31 of each year.

The California Franchise Tax Board (FTB) would be authorized to adopt regulations to prevent the avoidance or evasion of the wealth tax.

What Defines the Wealthy Targeted by the Law?

Imposes, for taxable years beginning on or after January 1, 2024, and before January 1, 2026, an excise tax on a “resident’s” worldwide net worth exceeding $1 billion, at a rate of 1.5%.

Imposes, for taxable years beginning on or after January 1, 2026, an excise tax on a “resident’s” worldwide net worth exceeding $50 million at a rate of 1%.  An additional rate of 0.5%, for a cumulative of 1.5%, is imposed on a “resident’s” worldwide net worth exceeding $1 billion.

Who is a Resident?

Defines a “resident” as:

a)      Every individual who is in California for other than a temporary or transitory purpose, and every individual domiciled in this state who is outside the state for a temporary or transitory purpose;

b)     A part-year resident, who is resident or non-resident of this state during a portion of the taxable year;

c)      A temporary resident who is neither a resident nor part-year resident; and,

d)     A wealth-tax resident, who is a person with wealth sourced to this state that has left this state and does not have the reasonable expectation to return to the state.

The tax imposed on part-year and temporary residents shall be calculated by multiplying the wealth tax liability by the percentage of the number of days the taxpayer was present in this state.

 Phases out the tax for exiting residents, and phases in the tax for new residents, over a period of four years.  The tax is prorated such that exiting residents pay their full wealth tax liability the first year they leave, 75% of their liability the second year, 50% the third year, 25% the fourth year, and no tax the fifth year.  This process is inverted for new residents of this state.

What Kind of Worldwide Property Must Be Reported and is Subject to the Tax?

Requires a taxpayer to include the following assets when reporting their worldwide net worth:

a)      Stock in any publicly and privately traded C-corporation;

b)     Stock in any S-corporation;

c)      Interests in any partnership;

d)     Interests in any private equity or hedge fund;

e)      Interests in any other non-corporate businesses;

f)       Bonds and interest-bearing savings accounts;

g)     Cash and deposits;

h)     Farm assets;

i)       Interest in mutual funds or index funds;

j)       Put and call options;

k)     Futures contracts;

l)       Art and collectibles;

m)   Financial assets held offshore;

n)     Pension funds;

o)     Other assets, excluding real property;

p)     Debts other than mortgages or other liabilities secured by real property;

q)     Real property; and,

r)       Mortgages and other liabilities secured by real property.

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