California lawmakers pushing new wealth tax to generate revenue, may cause exodus of wealthy residents.
The California State Legislature is considering a new bill that would impose an extra annual 1.5% tax on those with a “worldwide net worth” above $1 billion starting in 2024. The threshold for being taxed would drop to $50 million in 2026, with billionaires still being taxed 1.5%. This modified version of a wealth tax approved in the California Assembly in 2020 includes measures to allow California to impose wealth taxes on residents even years after they left the state and moved elsewhere. It is estimated that the tax would affect 0.1% of California households and generate an additional $21.6 billion in state revenue.
The proposed tax is part of a larger trend of blue states enacting wealth taxes in order to generate more revenue and address budget deficits. California is facing a $22.5 billion budget deficit, and advocates argue that the money from the tax could boost funding for schools, housing and other social programs. However, experts counter that the bill will have the exact opposite effect through high administrative costs and by causing an exodus of people to flee the state.
The proposed wealth tax has been met with criticism from experts who argue that it would be economically destructive, challenging to administer, and would drive many wealthy residents out of the state. They note that the 10 highest tax states lost nearly 1 in 100 residents in net domestic migration between July 2021 and July 2022, while the 10 lowest tax states gained almost 1 in 100. Additionally, the administrative costs associated with the tax could be as high as $660 million per year, or more than $40,000 per prospective taxpayer.
Proponents of the wealth tax argue that it is necessary to combat economic inequality. They point to the fact that the top 1% of taxpayers pay about 50% of state income taxes in New York, California and elsewhere, and that the money from the tax could be used to fund social programs. However, some experts argue that the tax would be counter-productive, wiping out nearly 20% of gains from investments and slowing innovation and investments.
The proposed wealth tax in California is part of a larger trend of blue states enacting such taxes in order to generate more revenue and address budget deficits. The bill has been met with criticism from experts who argue that it would be economically destructive, challenging to administer, and would drive many wealthy residents out of the state. Proponents of the tax argue that it is necessary to combat economic inequality, but some experts argue that the tax would be counter-productive, wiping out nearly 20% of gains from investments and slowing innovation and investments. Ultimately, the bill’s success or failure will depend on how the California State Legislature and Gov. Gavin Newsom decide to move forward.
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