If California were its own sovereign territory, there’s a good chance President Donald Trump would’ve already added it to his list of [bleep]hole countries.
From rolling energy blackouts induced by green-energy boondoggles to streets littered with human waste and needles because of lawless homeless encampments… to social justice no-bail policies that release prolific offenders back into communities to reoffend… to artificially inflated costs of living because of inept intervention into labor and housing markets… California has unintentionally provided the rest of America with a valuable lesson of what awaits other states when unhinged progressive politicians take over.
And we can’t forget the taxes – the onerous, through-the-roof taxes that are designed to penalize residents who have the nerve of attaining financial success.
Californians, for their part, are voting with their feet – leaving the Golden State en masse, with one local report observing that more people have left the state over the last seven years than have migrated to it. A shrinking population means a diminishing tax base, and with California currently struggling to offset a $50 billion budget deficit amidst the coronavirus pandemic, perhaps this moment provides an opportunity for Democrat leaders in Sacramento to reevaluate their obsession with soaking “the rich,” and in its place pursue policies that are more welcoming to high earners?
No? What a shocker…
How Much Wealth Is Too Much?
Legislative Democrats have instead proposed the nation’s first-ever wealth tax, a scheme that would expand the state government’s reach to cover a person’s combined assets. After all, why bring spending in line with tax revenue – also known as responsible governance – when it is far easier to treat “the rich” like a bottomless ATM?
Yet what makes this legislation truly alarming is that it would apply to former residents, as I’ll explain in a bit.
Normally, it’s risky to quote from legislation at length. The text is both painfully boring and intentionally opaque. It’s written by lawyers, for lawyers. But in this case, while the wording is still obnoxiously clunky, the intention of the text is abundantly clear. So we’ll reference large swaths of it to give a full picture of how progressives are planning to go after everything you own if you haven’t already waved goodbye to the Hollywood Hills.
With that said, let’s dive right into Assembly Bill No. 2088.
It starts with the fundamental conceit that lawmakers have been given the Solomonic wisdom to judge how much wealth is too much wealth. The words “excessive” and “extreme” as it pertains to wealth appear throughout the bill.
“For the benefit of accumulating excessive wealth in this state there shall be imposed an annual tax of 0.4% upon the worldwide net worth of every resident in this state in excess of the following… For married taxpayers filing separately, fifteen million dollars… For all other taxpayers, thirty million dollars.” (emphasis added)
Here’s State Assemblyman Rob Bonta of Oakland explaining the nuts and bolts of his proposal. Take note of how cavalier he is about what would otherwise be straight-up theft if he didn’t carry the government’s imprimatur…
If you’re a married couple filing jointly, if you have $30 million in joint assets, the amount over $30 million is what is taxed… So you get your first $30 million untaxed. Your next $10 million is taxed at about $40,000. Your next $10 million after that, another $40,000.
Bonta downplays anxiety over adding another tax to an already overtaxed state by relying on liberalism’s predictable battle cry… Marxist class warfare: “It affects about 0.15% of the California population – not the top 10%, not the top 1%, the top 0.15%… about 30,000 people.”
Of course, if you think that politicians who currently show no restraint with spending money they didn’t earn won’t eventually lower that threshold to entangle even more families, I have a totally on-budget, on-time high-speed rail project in California that would make for a great investment!
There’s a reason why the wealth tax has had very little success in other countries… It’s a logistical nightmare. Bonta may be surprised to learn that “worldwide net worth” isn’t like determining how much money you have in your savings account… It’s a little more complicated than that.
Or it could be that Bonta is aware of the nuances involved, and the sprawling bureaucracy that would be needed to enact his agenda is exactly the type of adrenaline rush that gets a power-hungry political junkie like himself out of bed in the morning.
Regardless, here’s how Bonta envisions California defining wealth for the purpose of taxing it:
• Stock in any publicly and privately traded C-corporation
• Stock in any S-corporation
• Interests in any partnership
• Interests in any private equity or hedge fund
• Interests in any other noncorporate businesses
• Bonds and interest-bearing savings accounts
• Cash and deposits
• Farm assets
• Interest in mutual funds or index funds
• Put and call options
• Futures contracts
• Art and collectibles
• Financial assets held offshore
• Pension funds
• Other assets, excluding real property
• Debts other than mortgages or other liabilities secured by real property
• Real property
• Mortgages and other liabilities secured by real property
This list isn’t even the final word, however, as the bill makes clear: “Assets that must be reported separately shall include, but shall not be limited to” (emphasis added). Say what you will about Bonta, but at least he understands that folks smart enough to amass $30 million in assets are likely smart enough to identify loopholes that his enforcers are not.
Speaking of enforcers, Bonta’s legislation would empower the aggressive Franchise Tax Board (California’s IRS) to “adopt regulations to carry out these provisions, including regulations regarding the valuation of certain assets that are not publicly traded” (emphasis added).
The political party that trips over itself to condemn any restriction on abortion as an abridgement of privacy rights sure is comfortable mandating an intimate relationship between you and the IRS…
The erasure of economic liberty aside, directing government pencil pushers to determine the value of personal possessions could be problematic, as David Kline of the California Taxpayers Association tells American Consequences…
The Franchise Tax Board would have an impossible task – attempting to accurately value assets whose values could not possibly be known unless they were offered for sale in an open market. The value of a work of art, for example, depends on what a buyer would be willing to pay at a particular point in time, and a tax auditor would not have a crystal ball to make such a determination.
Moreover, Kline says, high-income households socked with the wealth tax would end up spending “an outrageous amount of time and resources trying to estimate the value of their assets every year – with the additional risk of audits and penalties if the state disagrees with their estimates.”
To be fair, Bonta does leave room in his bill for taxpayers to appeal the state’s arbitrary assessment. Just don’t get your hopes up… “The burden shall be on the petitioning party” to demonstrate that the methodology was “unfair.”
Also be prepared for the Franchise Tax Board’s attempt to nullify a legal sale if it happened to decrease a person’s overall net worth. “Any transaction, a primary purpose of which is to reduce the valuation of a taxpayer’s worldwide net worth as of December 31, shall be disregarded.” Apparently, that’s considered “evasion.”
Yet as I mentioned earlier, these clauses aren’t even the most disturbing parts of the bill. That award goes to the section that targets those who are no longer California residents.
If passed, the wealth tax would hit affluent individuals who have lived in California over the last 10 years. “Avoidance,” asserts Bonta, “is not as simple as moving to another state. “We have a phased-in approach, whereby, if you move, in year one, 90% of the tax bill still applies to you. In year two, 80%, and so on, for ten years until it phases out.”
“Their wealth was accumulated during their time in California, during the nexus that they had with the state of California, and that is what we are proposing in our bill.”
I’m reminded of the lyrics from that famous Eagles song, “Hotel California” … You can check out anytime you like, but you can never leave.
This obvious overreach flummoxed Fox Business host Neil Cavuto, who seems to agree with my Eagles reference… “It sounds like they would be prisoners of California… you’re not letting them leave.” Cavuto then asked the California Democrat the obvious question of how this tax would be legally binding. A person living outside of California is no longer subject to its jurisdiction, is he? “We believe we can do that,” responded Bonta. “Certainly, we’re open to dialogue and discussion as we move the bill forward. But we think it’s a sound approach and has a strong legal foundation.”
Jim Burling, who is with the Pacific Legal Foundation, disagrees. He tells American Consequences that, while California “may be able to tax wealth within the state just like it can tax real property within a state, there is no basis for taxing nonresidents for wealth not located in the state,” adding that any attempt by lawmakers to tax the wealth of nonresidents could “violate the dormant Commerce Clause [of the U.S. Constitution] – a doctrine that holds a state cannot adopt laws that hinder the free flow of commerce across borders.”
As of right now, Burling says, there’s no case law on the constitutionality of a state wealth tax “because no state has yet been so craven as California to have adopted one.” Because California’s constitution “nowhere expressly refers to the proposal’s taxation of ‘worldwide wealth,’ there is a good argument that there is no state constitutional authority [to implement] such a tax.”
A wealth tax may be legally dubious, but by pressing for one, progressives don’t fully grasp how economies work. Economies are not static like a math equation… Rather, they are dynamic, representing billions of daily interactions that are impossible for control freaks like Bonta to regulate. When laws change, people alter their economic behavior and investment strategies to reflect their best interest under the new rules. It’s called human nature.
Bonta understands this reality on some level, or else he wouldn’t plan on harassing nonresidents for money once they’ve left California. Still, he largely believes that “the rich” will stay put to take it in the shorts rather than hightail it out and roll the dice in court when Bonta’s enforcers come knocking.
The great escape, however, appears to be in the works…
Dennis Brager, a Tinseltown tax attorney for the rich and famous, remarked that he’s “hearing from clients who would like advice on how to break ties with California in order to avoid paying what will amount to confiscatory taxes on their income and wealth.”
Echoing those concerns was Mauricio Umansky of the real estate company The Agency, telling one news outlet that “there is certainly a lot of conversation about getting out of California because of how expensive it is, but really more about the taxes – the fear of the new California taxes as well as the fear of the new wealth tax.”
Even the Los Angeles Times – no friend of free markets – dinged the wealth tax for rosy projections, arguing that it may have the unintended consequence of bringing in less revenue to state coffers. The Oakland Democrat optimistically claims that his wealth tax would generate $7.4 billion a year in revenue, but the Times notes that it could force “people to sell assets potentially at a loss in order to pay their tax bills.” Would such a scenario, the paper asks, cut “into the capital gains revenue upon which California is inordinately dependent?”
Sound tax policy, it writes, “requires more than just deciding which trees to shake.”
That advice, though, has fallen on deaf ears. The Democrats who’ve co-sponsored this legislation (at least a dozen of them) are intent on shaking as many trees as they can get their grubby hands on. As Bonta concedes, “Asking these well-resourced Californians to give a little more to keep our people working and support our most vulnerable is the right thing to do.”
Bonta has called his tax “patriotic” and “fair,” which are curious adjectives to describe what he’s trying to get passed. The demonized “one percent” already shoulder nearly 50% of the income tax burden.
Are they presently not patriotic? Does fairness require rendering that ratio more lopsided than it now is? Apparently so…
California is a laboratory for bad ideas. And these bad ideas have a habit of spreading across the country. Case in point, Governor Andrew Cuomo is fending off efforts by leftist politicians in his state to adopt a wealth tax for New Yorkers. Cuomo wisely maintains that such a tax would only accelerate the great pilgrimage down to Florida.
It’s uncertain whether California Governor Gavin Newsom will show similar resolve.
And although Joe Biden hasn’t endorsed a national wealth tax, progressive leaders in his party like Elizabeth Warren and Alexandria Ocasio-Cortez continue to make a punitive wealth tax central to any tax-reform package. Your stuff is their stuff, or so they think…
What’s wild is that the wealth tax may only be an appetizer for California’s Democrat Party. Simultaneously, it has introduced legislation that would raise the state’s current top marginal tax rate of 13.3% to a mind-boggling 16.8%. And it would apply retroactively, from the start of 2020.
Progressives in the Golden State seem intent on putting Margaret Thatcher’s observation on what ails socialism to the test… “Eventually, you run out of other people’s money.”
Jason Mattera is a New York Times best-selling author and Emmy-nominated journalist. This article first appeared at American Consequences.