Sunday, August 30, 2020

The Horrors of the Proposed California Wealth Tax: Will Harry and Meghan Teach Us the Loopholes?

California tax loophole artists?

Bill Whalen, the Virginia Hobbs Carpenter Fellow at the Hoover Institution, explains in The Washington Post  (emphasis in original):
California’s legislature has a few frenzied days before its session ends to decide whether to adopt a proposal to impose a 0.4 percent tax on personal fortunes north of $30 million ($15 million for married taxpayers filing separately). The draft legislation looks at Californians’ “worldwide net worth” derived from 18 categories of assets — including virtually every conceivable form of financial security, real property, offshore holdings, pension funds, farm assets, and art and collectibles, among myriad other items of value...

 The proposed wealth tax would impose levies on citizens for up to a decade after those Californians fled to lower-tax pastures... 
With all of these warnings, is the tax likely to be enacted? Democrats enjoy supermajority control of California’s two legislative chambers, so the requisite two-thirds approval is easily doable. Given the state’s massive budget deficit, Gov. Gavin Newsom (D) may be looking at an offer he can’t refuse — not when there’s a rosily estimated multibillion-dollar windfall involved, and not when the tax targets some 30,400 people in a state 1,300 times that large.
Of course, if this tax is imposed, it will only provide incentive for more high net-worth individuals to leave the state pronto or get creative.

Whalen writes:
California lawmakers may be tempting fate. The state’s revenue system already is overly dependent on millionaires and billionaires: The top 1 percent of taxpayers generate half of personal income tax receipts. And a recent study showed that Californians follow one of two paths when personal taxes go up: They stay and generate less revenue, or they leave.

So if a wealth tax passes, moneyed Californians such as Tesla’s Elon Musk may leave sooner than expected. Others among the affected 30,400 may stay but find clever ways to put themselves below the taxable threshold. Indeed, the Sussexes themselves may fall into this category. Harry entered 2020 worth an estimated $40 million, but after he and Meghan bought their new mansion, now has a reported $9.5 million mortgage to pay off. Add California’s exorbitant cost of living, annual property taxes and upkeep costs on a seven-acre property — all while neither Sussex is gainfully employed — and the couple may soon find themselves conveniently below the $30 million net-wealth demarcation line.


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