Democrat pushes wealth tax as $68 billion state deficit looms
A California Democrat is renewing his efforts to tax wealthy residents' net worth as a potential solution to closing the state's $68 billion spending gap.
And Democratic Assembly Speaker Robert Rivas' new approach to running bills through legislative committees means the proposal will get a hearing.
The bill from Assemblymember Alex Lee, D-San Jose, will be heard in a legislative committee today, a few hours after Gov. Gavin Newsom is expected to announce his fiscal 2025 budget proposal.
Assembly Bill 259 would institute a 1% tax on the net worth of residents with more than $50 million in assets, with a 1.5% bracket for those with more than $1 billion. The current top income tax rate, levied on millionaires, is 13.3%.
The Assembly Revenue and Taxation Committee, which will hear testimony on the plan, did not take up Lee's bill last year after he introduced it.
“AB 259 is getting a hearing because leadership would like committee chairs to give bills an opportunity to be heard,” said Committee Chair Jackie Irwin, D-Thousand Oaks, in a statement.
Rivas spokeswoman Cynthia Moreno declined to comment on the content of AB 259. But she shared a statement laying out Rivas' stance on working with committee chairs.
“The speaker has confidence in the strength of his chairs and will work with them to ensure bills moving forward reflect a broad consensus within the caucus,”
Moreno said in an email. “The speaker believes legislation introduced in good faith deserves an opportunity to be heard, but expects authors to collaborate with chairs and all our colleagues.”
Lee is now trying to see if he can advance the conversation during the second half of a two-year legislative cycle, especially as California leaders grapple with ways to fix the state's finances.
Lee has pushed a similar tax in the past, and it's not clear how much support his 2024 effort will get. Newsom has opposed such taxes in the past.
But the state faces tough choices this year about spending, and leaders could wind up looking at ways to increase revenue.
A 2022 analysis from Lee showed the bill's initial phase, which would apply only to the state's 170 billionaires, could raise about $10.6 billion during the first year.
The measure would phase in the $50 million bracket in later years, which could raise more than $20 billion annually, Lee said.
“We know that just taking out the entire rainy day reserve, or just cutting everything that we love, like our transit systems, our schools, our climate change programs — nothing alone will solve this,” Lee said. “So you have to have a mix of solutions. That's responsible budgeting.”
Lee sees his bill as a way to protect state budget priorities while seeking revenue from residents who “disproportionately are advantaged by having their wealth stored here in California.
“We've finally hit pretty good per-pupil funding, we finally put so many investments, and those things need time to mature,” he said.
If there is an economic downturn, “We always know those at the bottom will be hit twice as hard. Because if we cut the social safety net, those are the same people that get screwed twice. So I don't want to see that at all.”
But Jared Walczak, vice president of state projects for the Tax Foundation, a center-right Washington, D.C. research group, said a wealth tax is “not a good long term solution to California's budget challenges.”
“The state has also, because of those high taxes, lost a sizable and growing number of high-net worth individuals and businesses,” Walczak said. “A wealth tax would dramatically exacerbate those trends.”
The nonpartisan Public Policy Institute of California in October reported the state is losing people from all income levels. However, the PPIC attributed the departure of higher income earners to the rise of remote work during the coronavirus pandemic.
Lee called concerns about wealthy Californians leaving the state due to a new tax “your classic kind of aristocratic power, where if they say, `Oh, if you do this and upset us, we'll do something.' But that doesn't ever bear out to be true.”
Walczak also suggested a net worth tax could hurt California's start-up culture because venture capitalists invest money based on a potential company's projected value, even if it has not yet become profitable.
“A wealth tax on that could destroy the business before it has a chance to get started,” he said. “Or, alternatively, the taxes would have to be essentially placed as a lien on the business to be paid much later, which just turns it into an extremely high-rate income tax on the company at some later date.”
A net worth tax could also prompt constitutional questions, Walczak said, and lead to “significant litigation that could preclude collections, or at least complicate those issues.”
Newsom has not been a fan of wealth taxes during his time in office. In 2021, he said such taxes are “going nowhere.”