Even in progressive California, introducing a new tax on ultra-wealthy residents is a gamble. But a Democratic lawmaker is trying again, this time flanked by similar efforts in other blue states.
A bill that San Jose Assemblyman Alex Lee plans to introduce would impose new taxes on California’s “extremely wealthy,” at a rate of 1.5% for those worth more than $ 1 billion from next year, and at 1% for those worth more than $50 million from next year. in 2026.
If passed, the tax would affect 0.1% of California households and generate an additional $21.6 billion in state revenue, according to Lee.
“This is all in the spirit of making those who don’t pay their fair share pay what they owe,” Lee said, pointing to a ProPublica report that exposed how the world’s richest people use legal loopholes to avoid income taxes, to accumulate wealth instead. through assets such as stocks that are not taxed unless sold.
Lee’s proposed tax targets a person’s “global wealth” — not just their annual income — including such diverse assets as stocks and hedge fund interests, agricultural assets, and art and collectibles. It is similar to proposals that progressive senators Bernie Sanders (I-Vt.) and Elizabeth Warren (D-Mass.) championed during the 2020 presidential campaign, and to a plan that President Biden put forth last year that never passed the Congress passed.
In the absence of a federal wealth tax, the State Innovation Exchange, a nonprofit progressive organization, and the State Revenue Alliance, which works with labor groups to call for taxing wealthy people, have brought together a handful of states to create policies as part of the “Fonds Our Future” campaign. The California bill was announced Thursday as a joint effort with officials promoting similar wealth taxes targeting capital gains and “unrealized gains” in Connecticut, Hawaii, Illinois, Maryland, New York and Washington.
“States rely on their power. They remind us that states are the laboratories of democracy,” said Charles Khan, who is a member of the State Revenue Alliance’s advisory committee.
But the initiative faces an uphill battle in California, despite its Democratic stronghold in the state legislature. Similar efforts by Lee have previously failed, and Governor Gavin Newsom has shown no signs of supporting such a move.
Newsom parted ways with his own party last year when he came out in November’s vote against Bill 30, which would have raised income taxes for the wealthiest Californians and used the money to subsidize electric vehicles and suppress wildfires. The governor said the plan was “fiscally irresponsible” and criticized Lyft for funding it, calling it a “cynical plan to get a huge taxpayer-funded subsidy” because ride-share companies are using more electric add vehicles to their fleet.
Another measure that would have raised taxes on California’s wealthiest to fund pandemic public health programs also lacked Newsom’s support, prompting organizers to keep it off the 2022 ballot.
In the legislature, previous attempts at a wealth tax have not gotten very far. Last year’s version was basically dead on arrival and was not put to a vote in a single committee.
But Lee believes the legislation is more likely to pass this time, in part because of California’s projected $22.5 billion budget deficit. The revenue from the proposed tax would go to the State General Fund.
“That way we can continue to deal with our budgetary problems,” he said. “In short, we could close the whole gap.”
Lee said the national push also helps ease concerns that California’s wealthiest will leave to avoid new taxes, as more states could do the same. “It’s a ‘they can run, but they can’t hide’ situation,” he said.
A report by the nonpartisan California Policy Lab found that there is “little evidence that wealthy Californians are leaving en masse,” but the threat of such a loss remains.
That’s because California’s progressive tax structure makes the state budget disproportionately dependent on the wealthiest residents — and that was largely due to the state’s boom years even during the worst of the COVID-19 pandemic.
The bill is supported by the California Federation of Teachers and opposed by the California Taxpayers Assn.
California Taxpayers Assn. President Robert Gutierrez said the state should not risk losing its top earners in a time of economic uncertainty. He also questioned the fairness and practicality of a unique tax on assets and total wealth.
“When would the state set the tax on stocks, the value of which can fluctuate dramatically from minute to minute? Would California’s tax inspectors travel the world every year trying to track down and verify unique works of art, vehicles, iconic Hollywood props, and other items whose market value is not known with any certainty? ” he said. “Would wealthy individuals stay in California and wait for these questions to be answered?”
But Emmanuel Saez, an economics professor at UC Berkeley, said the initiatives could work successfully and make a significant difference in “restoring tax justice.”
“Our current tax system, at both the federal and state levels, does not tax the vast wealth amassed by billionaires. Billionaires can keep the profits within their companies, and if they don’t sell their stock, they can avoid individual income taxes. If they retire in Florida and sell their business, they will never pay income taxes in the state where they made their fortune,” he said. “Relative to their actual economic income, billionaires end up paying a lower tax rate than the rest of us.”
The chances of the bill passing are further complicated by the legislative procedures required to make it into law.
As a tax increase, the bill requires the approval of two-thirds of lawmakers in both houses. In addition, a two-thirds supermajority would need to support an accompanying constitutional amendment to remove the current limit on taxing personal property. After that, the proposal would be submitted to voters for final approval.