California is face-to-face with a fiscal judgment day of its own making. An unhealthy combination of reckless spending — doubling of the state budget over the past ten years after population growth and inflation — combined with a progressive tax system that produces most of its revenue from a tiny sliver of the population has produced a staggering projected deficit of $68 billion during this fiscal year.
The Golden State, facing unfunded liabilities for an estimated $150 billion in addition to estimated pension deficits of more than $1 trillion for retiree health insurance, still found it advisable to include health care coverage for illegal migrants, including offering surgery for gender transition surgery.
The 2022 difficult stock market resulted in a shortfall in revenue from projected capital gains taxes in a system so dependent on the top 1% that half of all tax revenues are derived from that cohort. During troubled economic cycles, this makes state revenues irresponsibly deficient.
Facing many financial challenges and an astronomical budget deficit, California is considering an unprecedented move — putting a wealth tax on its residents in place. The proposed bill, if it is enacted, would impose an excise tax on residents’ worldwide net worth exceeding $1 billion. It’s a boon for tax accountants and appraisers.
But the tax implications reach far beyond revenue generation and stir contentious debate on California’s fiscal priorities, the potential departure of high-net-worth individuals, and economic repercussions.
The proposed wealth tax is broad and encompasses both part-time and full-time California residents. The legislation aims to generate significant revenue to fill the state’s budget deficit by raising a 1.5% excise tax on global net worth exceeding $1 billion. By 2026, the tax net will widen to wealth exceeding $50 million — at a 1% rate yearly — with an additional 0.5% tax on assets that exceed $1 billion.
Democrats in Sacramento gave a big break to their Hollywood and high-end real estate donors with an exemption for real estate owned personally. As the Wall Street Journal noted” “This carve-out would encourage the wealthy to shift more of their investments into real estate.” Ongoing speculation is that it offsets damage from San Francisco and Los Angeles” “mansion taxes” on real estate sales.
The fiscal mess in California, attributed to delayed revenue, high tax rates, and Covid-19 disruptions, is encased in the proposed wealth tax. Democrat Governor Gavin Newsom claims a $38 billion hole in the budget, though most estimates are as high as $68. California’s expansion of healthcare to undocumented migrants, increased Medicaid spending, and other spending priorities contribute to the urgency that drives the wealth-tax proposal.
Spending in the state has doubled following population growth and inflation in the past ten years. Now, anyone crossing the border from another country gets free care and health insurance, including gender transition surgery, among other” “necessities.” Otherwise, anyone working in California will be forced to struggle to pay additional insurance costs.
Although the wealth tax has been positioned as a solution to the fiscal woes in California, the possibility of individuals with high net worth fleeing the state is looming large. The wealth tax might act as a disincentive for affluent residents and business leaders to remain in California, with implications for job creation and the state’s economic vitality.
The proposed wealth tax coincides with the increase in other taxes. The top tax rate in California on wage income rises 14.4%, increased from 13.3%. Further, new legislation eliminates the $145,600 wage ceiling on a state employee tax of 1.1%, complicating the financial landscape for workers and businesses.
A close-up of the proposed legislation reveals possible winners, particularly trial lawyers. The legislation gives lawyers the authority to utilize the state’s False Claims Act, providing “bounty for these attorneys to investigate records and wealth statements.
Imagine a rush of lawyers moving to the Golden State to go after individuals with high net worth to try to collect the wealth tax. How will the attorneys value these assets? They’ll have a field day. California’s persistent tax-and-spend plans, highlighted by the wealth-tax proposal, could complicate the state’s challenges. The risk of driving away businesses and high earners, along with the potential legal battles that stem from the proposed legislation, raises questions about the long-term impact and sustainability of such reckless fiscal measures. Governor Newsom has said he does not favor the tax, but fiscal necessities may make that promise doubtful.
The Golden State’s contemplation of a wealth tax is a high-stakes gamble with wide-reaching consequences. As the state continues to deal with a massive budget deficit, the proposed legislation emphasizes the complexity of balancing the need for revenues, economic motivations, and the potential for a possible unintended fallout. The questionable move worsens its already precarious financial situation.
In the meantime, costs soar with higher government salaries and high minimum wages. Sacramento Dems clearly aren’t concerned with working people, only their favored constituencies and donors.
Governor Gavin Newsom wants to take his fiscal management to the White House. Lord, help us.