California’s state house has a problem. Its legislators want to continue its policy of milking its rich residents for all they’re worth, but don’t want to face the consequences of their actions in the form of wealthy people leaving the state in droves. Their solution to this dilemma? Tax those wealthy citizens who dare to flee even after they’re gone.
One of the beautiful things about the American federal system is that taxpayers can vote with their feet. Americans who believe in a larger government with higher taxes can choose to live in a state like California, while Americans who prefer a smaller government that allows them to keep more of their money can choose to live elsewhere.
The problem for California is that its erstwhile residents continually vote with their feet against the state’s tax policy. The state lost more than 60,000 residents in 2017-2018, the last year for which the IRS has migration data, shrinking its tax base by $8 billion. Between 2010 and 2018, the state’s tax base shrunk by more than three times that amount.
And when it comes to tax proposals, California legislators are not short on ideas to extract more cash from its residents. So far this year, lawmakers have already proposed raising the state’s top income tax rate to an amount higher than some nations, 16.8 percent, and amending the state Constitution to eliminate limits on the amount that property taxes on industrial and commercial properties can increase each year.
But the surest proposal to encourage its wealthy residents to head for the exit would be a proposed 0.4 percent wealth tax. This tax would exclude real estate from a resident’s calculated net worth, but all other assets (including those located out-of-state, or even out-of-country!) would be subject to the tax. That alone would make the tax questionable, considering Constitutional prohibitions against states imposing undue burdens on interstate commerce.
Wealth tax rates often appear misleadingly low, disguising just how impactful they would be. Advocates tend to play up this tendency, such as when Senator Elizabeth Warren claimed her 2-6 percent wealth tax would require wealthy Americans to “pay two cents out of their bazillion [sic] dollars.”
With income and payroll taxes, the levies with which Americans are most familiar, a given $100 of earnings is taxed only once and tax rates are easily understood. With wealth taxes, however, a given $100 of assets could be taxed every single year, meaning that even a relatively low rate can compound over years to the point where the government’s take is much larger than the sticker price would suggest.
Therefore, it’s unsurprising that the tax’s proponents fear a Californian exodus should the tax be implemented. As a result, the wealth tax would include a ten-year exit tax, which essentially phases out the 0.4 percent wealth tax by 0.04 percent each year until ten years have passed since a former California resident has left the state.
Such a tax would violate the Constitution’s prohibitions against interstate commerce burdens even more than taxing a taxpayer’s worldwide assets would. Even more importantly, it would violate basic tenets of tax fairness, funding services in a state that the taxpayer would no longer have any connection to.
California has long been a mad scientist’s laboratory of bad state policies, but attempting to tax the wealth of Americans who have left the state represents a new low for the state. The Eagles’ song “Hotel California” should not be allowed to describe the plight of taxpayers trying to flee the state’s ever-growing tax apparatus.
Andrew Wilford is a policy analyst with the National Taxpayers Union Foundation, a nonprofit dedicated to tax policy research and education at all levels of government.