Last week, a few ultra-progressive legislators and a radical public employee labor organization proposed a new wealth tax which they claim would raise approximately $22 billion a year annually.
Although the tax would be imposed only on the super wealthy, its downstream consequences would be felt by all Californians no matter their income or bank balance.
Here’s what normal people should know about this proposal.
First, it would indeed be a tax on the wealth of some of the richest Californians. According to the proponents, the tax would be equal to 1% of a person’s “household wealth” if that person had wealth of $50 million or more. It would also grab 1.5% of wealth over $1 billion. According to the proponents, there are only 169 billionaires in California. Therefore, they argue, the vast majority of Californians would not feel the sting.
The tax hike proposal was introduced last week by Alex Lee, California’s youngest member of the Assembly. Lee is 25 years old and still lives with his mother in the San Francisco Bay area. The so-called “California Tax on Extreme Wealth” is also sponsored by California Federation of Teachers who, in addition to refusing to let its members go back to the classrooms, has never met a tax it didn’t like.
There are so many problems with this measure, it’s hard to know where to begin.
First, even for those who cry “eat the rich” the question is why do we want our state taxes to go even higher?
California already has the highest income tax rate in America, the highest state sales tax rate in America and the highest gas tax in America. And despite claims that Proposition 13 has resulted in low property taxes, that just isn’t true. California ranks 17th out of 50 states in per capita property tax collections.
Second, California doesn’t need the revenue. Tax revenue is more than $10 billion above projections and we already have a $22 billion surplus, even during COVID. Moreover, compared to fiscal 2019-20, revenues are $34 billion higher than in the months before the pandemic. Add to that the $100 billion collected from the federal recovery packages, with another $150 billion on the way. Given that California is awash in revenue, most citizens would rightfully question the need for a new multi-billion-dollar tax hike.
Third, there is a real problem with trying to implement a wealth tax.
A wealth tax differs from income or sales taxes because it taxes assets regardless of whether they are sold, traded or earn a dividend. Unlike general income or capital gains, the determination of wealth is reliant on the market value of assets, which often cannot be valued until they are sold or at least appraised.
Given that wealth taxes are imposed annually, would this law require those who meet the wealth threshold to maintain a rolling balance sheet?
Indeed, would all taxpayers have to disclose the value of their property, retirement accounts and other assets to prove they didn’t meet the threshold?
A wealth tax not only violates the basic principles of fairness, but it is highly impractical, difficult to enforce, and would result in tax avoidance strategies that only accountants would love.
Fourth, why spit in the faces of those who produce the lion’s share of California’s income tax?
Currently, California is overly reliant on a handful of high earning individuals who pay the top 13.3% rate. One-half of one percent of all California taxpayers contribute over 40% of all income tax receipts.
What will those residents do when a new wealth tax grabs a slice of everything they own, on top of the annual 13.3% personal income tax? Most likely, move to a state that imposes neither a wealth tax nor an income tax. Those states include Nevada (not a long way to go), Texas, Florida and Tennessee.
Fifth, given California’s well-deserved reputation of being anti-business and anti-taxpayer, it would be foolish to become the only state that also taxes total household wealth. Although other socialist politicians — including Bernie Sanders and Elizabeth Warren – have embraced the idea, this might be too radical except for the most progressive political leaders.
In fact, Governor Gavin Newsom has stated he would oppose such a tax — at least for now. (We remember how he equivocated on the split-roll property tax only to jump in and back it at the last moment).
Finally, backers of the wealth tax base their arguments less on the need for more revenue – which they cannot justify anyway – but rather the need to address wealth “inequality.” They argue that these super wealthy individuals have the means and others do not and so we need to redistribute the wealth. This is precisely the foundation of Marxism.
Do we really want to go down that road?
Jon Coupal is president of the Howard Jarvis Taxpayers Association.