The recently introduced California wealth tax proposal essentially contains three components. The first, a wealth tax of 1% on household wealth over $50 million and 1.5% on wealth over $1 billion, would apply starting in 2024 and to those with over $50 million starting in 2026. It would be based on worldwide net worth, with some exceptions, and would apply to 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 after a taxpayer leaves California. Also included are provisions that enable certain taxpayers to defer payment by contracting to pay the tax in the future, even if they leave. The third component is an enabling amendment to the California constitution.

While the California proposal is unlikely to pass, thanks in part to Gov. Gavin Newsom’s opposition, ultrawealthy taxpayers should be wary of what it portends. The California proposal doesn’t stand alone. Proposed legislation in Hawaii would impose a tax of 1% on state net worth exceeding $20 million, and proposed legislation in Washington would impose a tax of 1% on taxable worldwide wealth over $250 million.

Other states, including New York, have taken steps toward taxing the ultrawealthy, though primarily through higher taxes on capital gain and other income. Late last year, Massachusetts imposed a surtax of 4% on income over $1 million through a ballot initiative—and this example is perhaps telling. The “Massachusetts millionaires’ tax” had been introduced and defeated multiple times before finally becoming law.

The most recent wealth-tax proposals may not pass this year but, as in Massachusetts, it’s not the first time such proposals have been considered. They, too, may be part of a trend in which voters and politicians gradually become more comfortable with a targeted new tax.

https://news.bloombergtax.com/tax-insights-and-commentary/california-wealth-and-exit-tax-shows-a-window-into-the-future