Most people are still affected by the pandemic these days. The IRS and state governments are also feeling the pain of the revenue. A multi-sponsored California bill would raise the state’s already stratospheric highest income tax rate from 13.3% to 16.8%.
Not shocked yet? The latest tax some Golden State lawmakers want to impose is a 0.4% wealth tax. This would already be the “nationwide wealth tax” aimed at the very rich. That doesn’t depend on income, mind you, but on your wealth. A summary of the bill reads: “AB 2088 will introduce a statewide net tax that sets a rate of 0.4% on all net worth over $ 30 million.” Rob Bonta, a member of the Oakland California Convention, suggested the legislation. The tax would be applied to the net worth of approximately 30,400 Californians, “which brings in about $ 7.5 billion a year,” the executive says. “The tax takes into account all of the assets and liabilities held by an individual worldwide and captures the immense level of accumulated wealth held by the top 0.1% of Californians.”
Several US bills over the flag of the US state of California
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Various public employees and trade union groups are predictably behind the bill. This also applies to environmental groups like the Sierra Club. The target audience may be considering moving from California, but some observers feel that the property tax rate should be even higher. There are administrative nightmares too. Prosperity is not about income, it is about wealth. How do you determine the value of everything you own? For example, what about stock options in private companies? Bet you could say a number and the notoriously aggressive Franchise Tax Board could say something entirely different. That could lead to more than billionaire CEO Elon Musk threatening to leave California.
Aside from wealth tax, high taxes are nothing new in California. The state already has a national maximum rate of 13.3%, and another recently introduced tax law would retroactively raise it to 16.8%. Proponents say the higher taxes will result in a fairer tax structure. Even ahead of the proposed changes, the top 1% of California income earners are paying most of the state’s income tax revenue (a whopping 46% in 2016). The top 5% made up two-thirds of income tax that year. However, AB 1253 (Santiago) would levy even higher taxes retrospectively from January 1, 2020.
If passed, high-income Californians would pay an additional 1% on incomes over $ 1,181,484, 3% on incomes over $ 2,362,968, and 3.5% on incomes over $ 5,907,420. These dollar thresholds look strange, but they are $ 1 million, $ 2 million, and $ 5 million plus inflation adjustments. You would only meet very high-income Californians and raise California’s tax rate on income over $ 1 million from 13.3% to 14.3%. California’s highest rate would be a whopping 16.8%. You can read Assembly Bill 1253 for yourself. When it’s over, some Californians could hop in their Teslas and head to Texas, Nevada, or Washington, where there are no state income taxes. Indeed, moving to another state would mean lower state taxes. The current maximum rate of 13.3% – which is the same in terms of ordinary income and capital gain – dates back to 2012. With the 2018 changes to the Federal Tax Act, the payment of non-deductible state taxes will be (after a cap of $ 10,000 ) 13.3% even more painful.
Moving around sounds easy, but if you’re not careful how you’re doing it, you could leave California and still be asked to keep paying California taxes. California has wide coverage in other states, and in some cases California can set taxes regardless of where you live. Should that discourage you? No, but it’s worth knowing what to expect.
Many aspiring former Californians find it difficult to distance themselves from California and they may not plan for California tax authorities to prosecute them. These rules are unforgiving, and when battling California tax bills, the process counts. Your exam risk can also be daunting. The IRS can examine 3 or 6 years, but California can sometimes examine forever. Various things can give the FTB an unlimited amount of time to examine you. Like the IRS, California has unlimited time if you never file an income tax return. However, some fear that saying goodbye to California taxes could mean a hi-res residency check. The fact that the top tax rate could be increased retrospectively to 16.8 could keep some people moving, despite the audit risk.