There is a lot of talk about how millionaires, big business and citizens living in blue (Democratic) states are fleeing to red (Republican) states. The reason is that in the former there usually are a series of red tape, tax regultation and a rampant attack against economic liberties that are not seen in the latter.
But interstate moves are not only a phenomenon that occurs among billionaires and businesses that “run away” from heavy tax burdens and regulations. In fact, citizens and workers do so as well. Texas, for example, is the second state in the country to receive most people moving in 2019. Where did most of the citizens who came to live in Texas come from? California.
These facts can no longer be categorized as isolated situations, but as a manifest reality: California is losing businesses, jobs, workers and the millionaires who support the state’s coffers.
In California, there is a rather serious structural problem of finances, only 1% of the richest people pay approximately 46% of total state taxes. Basically, only 1% of taxpayers finance half of everything the state comes up with.
In the face of this systematic and increasingly entrenched problem, what is the legislature proposing?
A more flexible tax regime, incentives for investment, less state regulation, guarantees of unrestricted respect for economic liberty? No, nothing like that. The strategy is to redouble the tax bet: propose an unusual tax that could -if approved-, capture and pursue millionaires -and small fortunes- even if they were not from the California state itself.
What is this tax?
It is an estate tax, “Assembly Bill 2088,” that would apply for a decade and seek to tax the finances of someone who spends as little as 60 days in the state in a single year.
The tax would be 0.4% on residents with a world wealth of more than $30 million or $15 million for a married taxpayer filing separately.
Who would it apply to? The tax would apply to residents, mid-year residents and temporary residents. Who are the latter? Those who spend about 60 days in the state for any reason or circumstance.
The bill proposes to calculate the estate tax taking into account the current net worth of the taxpayers every December 31st. In theory, for mid-year and seasonal residents, the tax would be proportional to their number of days in California.
When does it mean that the tax would be on current net worth? That it would include wealth earned, inherited, or obtained through gifts or estates long before and long after leaving the state.
Hank Adler explains this very well in the Wall Street Journal:
“The proposed wealth tax would fall on a star high-school or college athlete who grows up in California but becomes a wealthy professional in another state after graduation. It would grab a scientist who develops a drug to cure cancer years after leaving California. A grandchild who spent a single summer surfing in Southern California would be subject to the tax. It would include anyone returning home to a foreign country after 60 days in California.”
The author also makes clear the following hypothesis: “Imagine the child of a Saudi prince being asked to pay a California wealth tax during college and for nine years after graduation.”
Why is this tax worrisome for California?
In addition to the crazy tax that would affect anyone who spends 60 days or more in the state, there is great concern about the lack of creativity of lawmakers in obtaining solutions to the structural problems that the politicians themselves caused.
A Katy Grimes’ article for the California Globe reads: “California is bleeding jobs and has been for two decades, as Democrat lawmakers only continue to pass laws and policies which exacerbate this: job-killing business regulations, and high corporate and personal tax increases. And the continue pushing more and more funding to special interest groups and labor unions.”
“There is a huge almost child-like disconnect between Democrat lawmakers and economics. Regardless of their destructive economic policies, they believe higher taxes and a federal bailout will fix everything.”
The Golden State’s record is worrisome. According to Grimes, between 2001-2011, California lost 33% of its manufacturing base and 613,000 jobs, according to a Milken Institute study that analyzed regulations and high taxes on Californians.
But that’s not it. MSN revealed that, from 2001, just as China joined the World Trade Organization, to 2018, California lost 654,100 jobs that went to the Asian giant.
In addition, according to the Los Angeles Times, 562,500 jobs were lost in California, which would be 3.34% of the state’s total of 16.8 million jobs in 2017.
If this worrying estate tax were to be applied, adding to individual taxes and adding the tax burdens imposed on those who left California, 1% of the state’s population would pay about 53% of individual taxes.
The bottom line is that the California legislature wants to make billionaires pay for the state’s long-standing social policies, rather than promote private investment, attract jobs, and improve the quality of life for its citizens.
California’s fiscal deficit is becoming dangerous due to overspending, and the only solution politicians are finding to keep their expensive laws is to raise taxes. Voters who “benefit” from public policies continue to vote for the same rulers because they give them their state aid.
And so Californians enter an endless cycle of subsidy policies, spending growth, financial problems and tax increases.