Assemblymember Alex Lee’s Wealth Tax – Is It Time to Leave California?

Assemblymember Alex Lee’s Wealth Tax – Is It Time to Leave California?

For the third year in a row, Assemblymember Alex Lee (D-San Jose) has introduced a wealth tax, AB 259, along with a proposed constitutional amendment, ACA 3, which would tax net worths (worldwide assets) of more than $50 million at a rate of 1% (1.5% tax imposed at a higher level), with plans to tax at a lower tax threshold of $25 million, in the near future.

Joining Lee this time are Southern California Democrats in the Assembly and state Senate, including Assemblymembers Wendy Carrillo and Migue

l Santiago of Los Angeles, as well as Riverside County Assemblyman Corey Jackson, Long Beach-area state Sen. Lena Gonzalez and Inland Empire state Sen. Lola Smallwood-Cuevas.

This small “gang of wealth taxers” are proposing a wealth tax in direct contradiction to the constitution, which clearly states:

Un-apportioned Direct Taxes are Unconstitutional. A wealth tax would be (1) un-apportioned and (2) a direct tax and therefore unconstitutional. The U.S. Constitution allows the Congress to “lay and collect Taxes, Duties, Imposts and Excises” with two explicit conditions relevant here” (stated above at 1 and 2).

Our over-taxing California legislators results in an exodus of wealth, which has rarely been seen. In fact, there were 153 large companies that relocated headquarters in 2021, more than double the 75 that left in 2020 and more than triple the 46 that exited in 2018, according to a recent report from the Hoover Institution at Stanford University.

Eleven Fortune 1000 companies were among those that exited California in the past three years. McKesson, the biggest U.S. drug distributor and number nine on Fortune’s list, left the state in 2018 for Texas. Additionally, the following iconic companies have left California recently — TeslaOracleHewlett Packard EnterpriseCharles Schwab, American Airlines, Chevron, FICO, Hewlett Packard, CBRE, Norton Life Lock, The Joe Rogan Experience and The Daily Wire, to name a few.

And where are they moving to? Texas is the number one choice of California “Tax & Business refugees” wishing to flee California’s punitive tax and regulatory system:

So how does the tax work? If the “fair market value” of your worldwide real estate, business and other assets is $100 million, your annual wealth tax would, in addition to your California Income Tax, be $500,000 ($100m less $50m threshold = $50million x 1% = $500k annual wealth tax).

California would tax all assets of the wealthy, many of which lack a known market value. This could include tangible assets, like artwork, and nonfinancial intangible assets, like trademarks or goodwill, which can be nearly impossible to value. Worst of all, it can include ownership stakes in closely held corporations and partnerships, which are difficult to evaluate and which are subject to significant valuation swings from year to year, not to mention are highly illiquid (Mr. Lee’s proposal would force closely held, family companies to sell family company interest to pay his proposed tax).

Other countries have tried wealth taxes, which have historically brought in less revenue over time and have proven to weaken economies, not to mention chase the most productive members of society out of their tax reach.

Out of the 13 OECD countries which have imposed this form of wealth tax since 1965, only three European OECD countries still levy a net wealth tax – Norway, Spain and Switzerland. Some countries which have abolished their wealth tax include France, Italy, and Belgium, because of the policies’ detrimental economic impact on their countries.

However, seven states have coordinated the wealth tax effort this year, unlike prior years, including Connecticut, Hawaii, Illinois, Maryland, New York and Washington. California’s recent proposals have tended to include an exit tax—designed to continue taxing those who respond by leaving the state, posing a host of additional federal constitutional problems.

The problem, historically, with “new” taxes is that they start with a small group of people and eventually affect all or most of us. We are seeing a record number of clients inquire about where to move and how to navigate out of these excessive taxes, with many California taxpayers referring to Mr. Lee’s tax as a “taking” or “stealing” of our already taxed income.

Leaving California isn’t illegal, but if you’ve ever been audited by the Franchise Tax Board, you know the importance of correctly documenting your re-domiciling to another State, Territory or Country. You only need to read the Hyatt case to understand that the FTB will go through your trash for two years to try to “catch and tax” you.

Please do not hesitate to call us if you would like us to evaluate your tax savings currently or under the proposed wealth taxes. It’s not too late to leave or avoid Mr. Lee’s proposed tax…yet.


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