California Proposed Wealth Tax: Impacts Beyond the State’s Border

In the California legislative session that ended on August 31, 2020, a group of legislators signaled their intent to impose new taxes on the wealthy. Assembly Bill No. 2088 would have created a new annual tax of 0.4% on individuals with worldwide annual wealth over $30 million; that tax would have been imposed on individuals for up to 10 years after they left the state. The proposed tax was projected to generate $7.5 billion in new annual revenue for the state.

The legislation did not pass, but it indicates California may continue efforts to increase personal income taxes. When the legislature returns on December 7, 2020 for a new session, the substance of Assembly Bill No. 2088 may reappear in some form.

Knowing California is looking to increase tax revenues, taxpayers should consider the elements in Assembly Bill No. 2088 and begin planning for similar legislation in the future.

Assembly Bill 2088 would have required an annual valuation or statement of value, signed by the taxpayer, as of December 31 of each year. The assets that would have been subject to the tax were publicly traded stocks, bonds, options, and futures; stock in an S Corporation; interest in a partnership; interest in a hedge fund or equity fund; cash deposits; art and collectibles; pension funds; and real property.

Real property held directly by the taxpayer, such as a personal residence, was excluded from the wealth calculation. 

Part-year residents and non-residents would also have been subject to the proposed tax. A special apportionment formula addressed a new classification of taxpayer known as a Wealth Tax Resident (WTR). The WTR rules would have continued to apply for up to 10 years, even if the taxpayer no longer resided in California. Taxing individuals after they have moved out of the state is called “trailing nexus.”

Trailing nexus arises from the concept that activity generated in a state does not stop when the contact between the state and business ends. For example, the State of Washington imposes trailing nexus on businesses that leave the state for one year for business tax and four years for sales tax. But imposing a wealth tax on individuals for up to 10 years after they left would make a new California requirement — if it ever passes — ripe for a due process challenge. 

When the next legislative session begins, the California legislature could possibly pick this issue back up, along with other legislation that would increase the income tax rate for high-income earners. Residents and taxpayers in California should watch for changes and consult with advisors on the potential impacts.

Weaver’s tax professionals can help you understand the implications of proposed changes and plan for the coming year. Contact us. We are here to help.

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