California Activist Proposes Wealth Tax and Probably Unconstitutional Exit Tax

3 min readBy: Paul Galindo, Joseph Bishop-Henchman

Earlier this month, a California activist began gathering signatures to put a state wealth taxA wealth tax is imposed on an individual’s net wealth, or the market value of their total owned assets minus liabilities. A wealth tax can be narrowly or widely defined, and depending on the definition of wealth, the base for a wealth tax can vary. on the ballot. The measure would impose a new 35% income surtaxA surtax is an additional tax levied on top of an already existing business or individual tax and can have a flat or progressive rate structure. Surtaxes are typically enacted to fund a specific program or initiative, whereas revenue from broader-based taxes, like the individual income tax, typically cover a multitude of programs and services. (in addition to federal taxes and the existing 10.3% top state rate), and penalize people who leave the state by seizing 55% of assets exceeding $20 million. The money raised would be used to eliminate the state’s budget deficit and for purchasing controlling shares in large corporations.

The 17.5% surtax is unusual because it would be on a taxpayer’s total (not marginal) income whenever it exceeds $250,000, with another additional 17.5 percent taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. on total income (for a total additional 35 percent tax) whenever it exceeds $500,000. In the case of single taxpayers or taxpayers filing as head of household, these additional taxes would be levied on incomes greater than $150,000 and $350,000 respectively.

So say someone has adjusted gross incomeFor individuals, gross income is the total pre-tax earnings from wages, tips, investments, interest, and other forms of income and is also referred to as “gross pay.” For businesses, gross income is total revenue minus cost of goods sold and is also known as “gross profit” or “gross margin.” of $1,000,000 and taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. of $750,000. Today, their tax bill would be:

Federal Income Tax (35% top rate):

$241,574

State Income Tax (9.3% top rate):

$67,555

Payroll Taxes:

$41,648

Total Income and Payroll Taxes:

$350,777

Effective Tax Rate:

35%

With the new surtaxes, it would look like this:

Federal Income Tax (35% top rate):

$241,574

State Income Tax (9.3% top rate):

$67,555

Proposed Initiative Surtax (35%):

$262,500

Payroll Taxes:

$41,648

Total Income and Payroll Taxes:

$613,278

Effective Tax Rate:

61%

The same person faces an effective tax rate of just 28% if they lived in neighboring Nevada. Being able to cut your taxes in half by moving to the next state over is probably not an incentive California wants to offer. Staying would also mean your tax bill going up by over 74 percent. Marginal rates this high would undoubtedly curtail capital formation, productive investment, and economic activity.

The initiative’s sponsors have an answer to this too: hit people leaving with a hefty exit toll. The creatively named “Hasta La Vista Tax” of 36.8 percent is imposed when an individual dies or moves out of California. This exit tax would be on both recognized income and unrealized appreciation in asset values over $5 million. Since this tax inhibits commerce and burdens the right to travel, it is probably unconstitutional.

In addition, existing California residents who stay are hit with a one-time tax of 55 percent on assets in excess of $20 million.

Such enormous wealth and income taxes would probably be the best news Arizona and Nevada could get, because the exodus of capital and entrepreneurship will probably head their way.

The sponsor has until January 2, 2009 to gather the 694,354 signatures needed to place the initiative before California voters.

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