California legislators are proposing legislation to impose a new tax upon the state’s most wealthy residents, even if they have already moved to another area of the country.

Alex Lee, a progressive Democrat Assemblyman, introduced a bill last week in the California State Legislature to impose an additional 1.5% tax each year on anyone with a “worldwide wealth” of more than $1 billion. This would take effect as soon as January 2024.

The threshold for taxation would fall as early as 2026: people with wealth exceeding $50 million worldwide would be subject to a 1% tax, while billionaires would continue to be taxed at 1.5%.

The wealth of the world extends beyond an individual’s annual income and includes diverse holdings like farm assets, art, stocks, and interest in hedge funds.

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This legislation is a modified version a wealth tax that was approved by the California Assembly in 2020. However, the Democrat-led state Senate rejected it.

This new version includes provisions that allow California to impose wealth tax on residents for years after they have moved to another state.

California’s exit taxes are not new. This bill also contains provisions that allow for contractual claims to be made against the assets of wealthy taxpayers who don’t have enough cash to pay their annual wealth taxes bill. Most of their assets can’t be easily converted into cash. This claim would require taxpayers to file annual returns with California’s Franchise Tax Board, and eventually to pay the wealth taxes owed.

California was among the blue states to announce new wealth taxes last week. Other states included Connecticut, Hawaii and Illinois as well as Minnesota, New York, Minnesota, New York, Minnesota, Maryland, Minnesota and New York. Although each state had a different tax plan, they all shared the same idea: The rich must pay more.

Lee’s office did not respond to our request for comment. Lee has made statements that echo the message that wealthy residents should pay more taxes.

Lee tweeted, “The tax burden has been too heavy for the working class,” “The ultra-rich pay little to no tax by hoarding assets and wealth. It’s time to stop this.”

Lee estimates that the tax would be applied to 0.1% of Californian households, and would generate $21.6 billion more in state revenue. This would go to state general fund. California has one of the highest rates of tax in the country.

Advocates claim that the money can be used to increase funding for schools, housing, and other social programs. Lee also hopes that it will help to reduce California’s $22.5 billion deficit.

He told the Los Angeles Times that this is how we can continue to address our budgetary problems. “Basically, we could plug all the holes.”

Experts counter that the bill will cause an exodus of people from the state and increase administrative costs.

According to Fox New Digital, Gordon Gray, American Action Forum director of fiscal policy, said that it presents significant administrative challenges in asset and liability valuations, high and distortionary effective rate, and other issues that make it an inefficient source of revenue.

Others agreed with this sentiment, arguing that a wealth tax would likely cause many Californians to move out of the state.

Jared Walczak (Vice President of State Projects at Tax Foundation), stated that the proposed California wealth tax was economically harmful, difficult to administer, and would drive wealthy residents and their tax payments out of state. The bill allocates $660 million annually for administrative costs. This is more than $40,000 per potential taxpayer. It gives an idea of the difficulty in administering such a tax.

According to James Doti (president emeritus, economics professor at Chapman University), people are moving from high-tax countries into lower-tax ones. The net domestic migration of residents from the top 10 tax states decreased by nearly one in 100 between July 2021-2022, while those in the lowest tax states increased by almost one in 100.

California legislators who are pushing the wealth tax believe they can “get around the problem of residents moving away” by trying to tax people “even after they leave the State,” Patrick Gleason (Vice President of State Affairs at Americans for Tax Reform) said. Gray, Walczak, and he all doubted the legality or declared it unconstitutional.

Studies in the past have shown that approximately 50% of state income taxes are paid by the top 1% of taxpayers in New York, California, and elsewhere. This raises the question about how harmful a mass exodus from wealthy residents could be for tax revenue.

Walczak pointed out that California would be particularly affected by a wealth tax. He joked that Texas residents should be the most excited about such laws, as there have been many high-profile Californians who have moved to Texas in recent years.

Walczak stated that a wealth tax could have a devastating effect in California, where there are many startups. It could tax the owners of promising businesses on hundreds of million dollars of business value that never materializes. While few taxpayers would be willing to pay wealth taxes, many taxpayers would have to pay. Only those who work in Texas’ Economic Development Office should love California’s wealth tax.

Wealth taxes are supported by some, however, because they help to reduce economic inequality.

Maryland Democrat Delegate Jheanelle K. Wilkins has, for instance, proposed a bill that would allow families to owe taxes on inheritances exceeding $1 million instead of $5 million as it is today. After the COVID-19 pandemic, she said that such ideas would now be more popular.

She told the Washington Post that “that’s quite some money that we’re leaving on table.”

Others argue that wealth taxes are low and only the wealthy can afford them. Experts note, however, that the rates are based on net worth and not income so they have a significant impact.

Walczak demonstrated this point in a blog post. He used as an example, a $50 million investment that was held for 10 years, earning a 10% nominal annual return in an inflation environment of 3%. This investment would have yielded $46.5 million in investment returns in current dollars after 10 years without a wealth tax. It would however yield $37.3million if it were to levy a 1% wealth-tax, which would wipe out almost 20% of the gains.

Wealth taxes are a major contributor to investment returns being cut deeply, to the detriment of investors