The Potential Impact of California's Wealth Tax Proposal on San Luis Obispo

The Potential Impact of California's Wealth Tax Proposal on San Luis Obispo

California's proposed wealth tax has garnered attention, although it is unlikely to pass due to opposition from Governor Gavin Newsom. However, the proposal serves as a warning for ultrawealthy individuals, including those in San Luis Obispo, about potential future tax changes.


The California wealth tax proposal consists of three main components. The first component is a wealth tax of 1% on household wealth exceeding $50 million and 1.5% on wealth exceeding $1 billion. This tax would apply from 2024 to those with over $1 billion and from 2026 to those with over $50 million. It would be based on worldwide net worth, with certain exceptions, and would affect full-time, part-year, and temporary residents, subject to apportionment.


The second component is an exit-tax structure that allows the wealth tax to be applied for several years even after a taxpayer leaves California. It also includes provisions that enable certain taxpayers to defer payment by contracting to pay the tax in the future, even if they relocate. The third component involves an amendment to the California constitution to enable the implementation of the wealth tax.


While the likelihood of the California proposal passing is low, ultrawealthy taxpayers in San Luis Obispo should remain cautious about the potential implications. This proposal is part of a broader trend across the country. For example, Hawaii has proposed a 1% tax on state net worth exceeding $20 million, and Washington has proposed a 1% tax on taxable worldwide wealth over $250 million. In addition, states like New York have taken steps to increase taxes on the ultrawealthy, primarily through higher taxes on capital gains and other income.


These wealth tax proposals may not become law immediately, but they indicate a growing comfort among voters and politicians with targeted taxes on the wealthy. Furthermore, some states face budget deficits, which may lead to the exploration of new revenue sources. In California, the projected deficit of $22.5 billion aligns closely with the projected $21.6 billion revenue offered by the wealth tax proposal.


San Luis Obispo residents should also consider the broader national conversation on wealth inequality, with unsuccessful calls for a national wealth tax. While the political hurdles for a national wealth tax are significant, progressive states like California serve as testing grounds for such initiatives.


The potential for exit taxation is another factor to consider. Concerns about losing revenue from wealthy taxpayers relocating to lower-tax jurisdictions are not unfounded. This is why multiple states, including California, have taken action together. The US Census Bureau already reports instances of high net worth individuals migrating.


If the trend continues towards state wealth and exit taxes, it is essential to understand how they might be structured. Provisions of the US Constitution, such as the Privileges and/or Immunities Clauses and the Commerce Clause, will come into play. These clauses protect the right to travel and regulate interstate commerce, respectively. Any future wealth or exit tax is likely to be designed with consideration for these constitutional provisions.


For now, ultrawealthy taxpayers in San Luis Obispo who wish to avoid wealth and exit taxes must stay vigilant and be prepared for potential tax changes. Moving before such taxes take effect may be a viable option. Alternatively, maintaining part-time residency may trigger apportionment or proration to mitigate the tax burden. Other strategies include investing in exempt or excluded property, accelerating charitable contributions, and making family gifts through entities while considering federal tax implications.


While the current form of these taxes may not be imminent, it is crucial to recognize them as indicators of potential future changes. San Luis Obispo residents should stay informed and take proactive measures to protect their financial interests.




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