Retroactive California Tax Hike Proposed by Legislature

Democrats in the California state legislature have proposed a significant tax hike on taxable income of $1 million and higher. Legislators say the tax hike would raise more than $6 billion a year to help K-12 schools and government services hurt by the coronavirus pandemic.

Assembly Bill 1253 would add the following three higher tax rates:

  • A 1% tax on income above $1 million, but not over $2 million
  • A 3% tax on income over $2 million, but not over $5 million
  • A 3.5% tax on income over $5 million

The bill would apply retroactively to tax years beginning on or after January 1, 2020, and would be permanent.

Under existing law, the highest base rate for individuals and sole proprietors is 9.3%. There is also an additional 1% for income over $1 million often called a “millionaire’s tax”. There are four additional tax rates ending at 13.3% for incomes above specified amounts. They are 10.3% for incomes between $269,000 – $322,000; 11.3% for incomes between $322,000 – $537,000; 12.3% for incomes between $537,000 – $1 million; and, 13.3% for incomes above $1 million.

If AB 1253 were enacted, the 13.3% rate would rise to 14.3% for incomes above $1 million and the state’s highest rate would be raised to 16.8% for incomes above $5 million.
The proposal would result in a top tax rate of nearly 54% for federal and state taxes for the highest earners.

California already has the highest state tax rate at 13.3%, Hawaii is the second highest at 11%. Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming do not have an income tax.

According to the state Franchise Tax Board, AB 1253 would affect the tax returns of only 0.5% of California taxpayers. However, this small group already accounts for 40% of all income tax revenue collected.

The proposal would raise the highest state tax rate in the country even higher, increasing the possibility of wealthy Californians relocating to other states. Now that many executives are working remotely due to COVID-19, these top earners could easily leave California and work in another state that has no income tax.

We Can Help

If you’re thinking of leaving California, the team at RJI CPAs is available to help you navigate the process.