California is facing a fiscal Armageddon of its own making. A toxic combination of wild spending – a doubling of the state budget over the past 10 years after inflation and population growth – coupled with a steeply progressive tax system that generates most of its revenue from a tiny sliver of the population has yielded a staggering projected deficit of $68 billion this fiscal year.
This state, facing unfunded liabilities for retiree health insurance of an estimated $150 billion along with estimated pension deficits of over $1 trillion, still found it advisable to include health care coverage for illegal immigrants, including offering gender transition surgery.
The difficult stock market in 2022 resulted in a revenue shortfall from projected capital gains taxes in a system that is so steeply dependent on the top 1% that fully half of all tax revenues are derived from that cohort. This makes state revenues irresponsibly deficient in troubled economic cycles.
California, facing this astronomical budget deficit and a myriad of financial challenges, is considering an unprecedented move — implementing a wealth tax on its residents. The proposed bill, if enacted, would impose an excise tax on the worldwide net worth of residents exceeding $1 billion. Talk about a boon for appraisers and tax accountants.
However, the implications of this tax reach beyond mere revenue generation, stirring a contentious debate on the state's fiscal priorities, economic repercussions and the potential exodus of high-net-worth individuals.
The proposed wealth tax is a sweeping measure, encompassing both full-time and part-time residents of California. Levying a 1.5% excise tax on worldwide net worth exceeding $1 billion, the bill aims to generate substantial revenue to fill the state's budget deficit. By 2026, the tax net expands to wealth exceeding $50 million, at a 1% yearly rate, with an additional 0.5% tax on assets exceeding $1 billion.
Sacramento Democrats give a big kiss to their big high-end real estate and Hollywood donors with an exemption for personally owned real estate. As the Wall Street Journal noted, "this carve-out would encourage the wealthy to shift more of their investments into real estate." Speculation is that this offsets damage from Los Angeles and San Francisco "mansion taxes" on real estate sales.
California's fiscal mess, attributed to a variety of factors such as COVID-19 disruptions, delayed revenue and existing high tax rates, is encapsulated in the proposed wealth tax. Governor Gavin Newsom claims a $38 billion budget hole, though most estimates soar as high as $68 billion.
The state's increased Medicaid spending, expansion of healthcare to undocumented immigrants and other spending priorities contribute to the urgency driving the wealth-tax proposal.
State spending has doubled after inflation and population growth in the last 10 years. And now anyone who crosses the border from other countries gets free health insurance and care, including gender transition surgery among other so-called necessities. In other words, anyone who works in the state (regardless of wealth) has to struggle to pay additional costs for insurance.
While the wealth tax is positioned as a solution to California's fiscal woes, the potential for high-net-worth individuals to flee the state looms large. The wealth tax could act as a disincentive for business leaders and affluent residents to remain in California, with implications for the state's economic vitality and job creation.
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The proposed wealth tax coincides with increases in other tax rates. California's top tax rate on wage income rises to 14.4%, up from 13.3%. Furthermore, a new law eliminates the $145,600 wage ceiling on a state employee tax of 1.1%, further complicating the financial landscape for businesses and workers alike.
A closer look at the proposed bill reveals potential winners, notably trial lawyers. The legislation empowers lawyers to utilize the state's False Claims Act, which provides a ‘bounty’ for these lawyers to scrutinize wealth statements and records. Imagine the gold rush of lawyers moving to California to go after high-net-worth individuals to try to collect this wealth tax. How will they value all these assets? Appraisers will have a field day.
The state’s persistent tax-and-spend plans, exemplified by the wealth-tax proposal, may exacerbate California’s challenges. The risk of driving away high earners and businesses, coupled with the potential legal battles stemming from the proposed legislation, raises questions about the sustainability and long-term impact of such desperate fiscal measures. Newsom has said he doesn’t favor this tax, but fiscal exigencies may make that promise moot.
California's contemplation of a wealth tax is a high-stakes gamble with far-reaching consequences. As the state grapples with a colossal budget deficit, the proposed legislation underscores the complexity of balancing revenue needs, economic incentives and the potential for unintended fallout. This controversial move exacerbates its already precarious financial situation.
Meanwhile, costs soar with minimum wages and higher government salaries, courtesy of the political class. Democrats in Sacramento clearly don’t care about working stiffs, only their donors and favored constituencies.
Gavin Newsom wants to bring his fiscal mismanagement to 1600 Pennsylvania Avenue. God forbid.
