California Legislators Reintroduce Wealth Tax for 2023 Legislative Session

Assemblymember Alex Lee introduced a legislative package to impose a new 1.5% state tax on the worldwide wealth of California residents. Along with the proposed tax, the package includes a constitutional amendment to extend the state’s taxing authority to impose a tax on “all forms of personal property or wealth.”

The bill was introduced on January 19, 2023 along with similar proposals in Connecticut, Hawaii, Illinois, Maryland, Minnesota, New York, and Washington. Supporters of the tax say it would raise more than $21 billion in annual revenue and help address income inequality in the state. As a tax increase, the bill would require the approval of two-thirds of each house of the legislature.

2023 Wealth Tax Legislation

AB 259 would impose an annual tax of 1.5% on a California resident’s worldwide net worth in excess of $1 billion (or in excess of $500 million for married taxpayers filing separately) for tax years beginning on or after January 1, 2024 and before January 1, 2026. The reach of the tax would be expanded after 2026, with a separate tax rate for taxpayers with a lower wealth threshold. The law would impose an annual tax of 1% on a California resident’s worldwide net worth in excess of $50 million (or $25 million for married taxpayers filing separately). It would maintain the 1.5% tax rate on wealthier taxpayers by imposing an additional tax of 0.5% tax on a resident’s worldwide net worth in excess of $1 billion ($500 million for married taxpayers filing separately). To prevent taxpayers from avoiding the tax by leaving the state, the tax would reach transactions made during the previous four tax years.

Wealth Tax Bills since 2020

AB 259 is the latest attempt by California lawmakers to impose a wealth tax after previous attempts—in 2020, 2021, and 2022—failed with limited support. A change in the state’s fiscal outlook, from record surpluses to a projected budget deficit of more than $22 billion, could factor into the debate.

In 2020, legislators introduced AB 2088, which would have imposed an additional 0.4 percent tax on net worth of more than $30 million or more than $15 million if married filing separately. Governor Gavin Newsom opposed AB 2088, stating: “In a global, mobile economy, now is not the time for the kind of state tax increases on income we saw proposed at the end of this legislative session and I will not sign such proposals into law.”

In March 2021, during the 2021-2022 legislative session, Lee introduced the California Tax on Extreme Wealth, a legislative package similar to the current bill but with a more aggressive timeline. AB 310 would have imposed a tax of 1% on “worldwide net worth” on California residents with more than $50 million in net worth, or more than $25 million for married taxpayer filing separately, for tax years beginning after January 1, 2022. To achieve the same results as the current bill, the 2021 bill would also have imposed an additional tax of 0.5% on worldwide net worth on California residents with more than $1 billion in net worth or more than $500 million for married taxpayer filing separately. AB 310 also required the passage of ACA 8, a resolution to propose to voters a constitutional amendment that would authorize the legislature to impose a wealth tax. The 2021 bill, however, failed to advance out of its committee.

In 2022, Lee introduced AB 2289, a bill nearly identical to the current legislation that would have imposed a 1.5% tax on an individual’s worldwide net worth greater than $1 billion, beginning in 2023. As with the current bill, this would have expanded in 2025 to impose an annual tax of 1% of a resident’s worldwide net worth in excess of $50 million ($25 million for a married taxpayer filing separately) along with an additional tax of 0.5% of a resident’s worldwide net worth in excess of $1 billion ($500 million for a married taxpayer filing separately).

Additional Details in 2023 Legislation

AB 259 would define worldwide net worth with reference to specific federal provisions and would provide that the definition does not include specific assets, including out-of-state personal property, directly held real property, or liabilities related to directly held real property. The bill would authorize the Franchise Tax Board to adopt regulations to carry out the tax provisions, including regulations on the valuation of certain assets that are not publicly traded. This bill would also establish the Wealth Tax Advisory Council, which would determine an adequate level of annual funding and staffing for the administration and collection of the wealth tax.

False Claims Act

This bill would also apply the provisions of the False Claims Act to claims, records, or statements made in relation to the wealth tax. The False Claims Act makes any person who makes a false or fraudulent claim for payment or approval liable to the state for triple the damages that the state or political subdivision sustained because of the false claim. California legislators have recently made several legislative proposals to include tax issues under the False Claims Act.

Information Disclosure

The bill would also create an exception to existing laws against information discloser as long as the information is related to the wealth tax. Under existing law, it a misdemeanor for specified persons, including, among others, officers or employees of the state or its political subdivisions, to disclose information set forth or disclosed in returns, reports, or documents required to be filed under the franchise and income tax laws. AB 259 would provide an exception to this law for information related to the wealth tax and as long as certain information privacy protections are in place and the request is for a specified purpose.

Constitutional Amendment

The tax imposed by AB 259 would become effective only if the voters approve a specified constitutional amendment that would extend the state’s taxing authority to “all forms of personal property or wealth, whether tangible or intangible…” The amendment would also reduce the two-thirds majority threshold to a simple majority to “classify any form of personal property or wealth for differential taxation or for exemption.”