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January 25, 2024 4 minutes to read ∙ 800 words

The California Wealth and Exit Tax: Can One Ever Actually Leave the Sunshine State?

Allison D.H. Soares and Lauren Suarez

California is a state known for many things: the beach, the sand between your toes, diversity, and extremely high taxes. California has always had one of the highest state taxes in the United States, and during the COVID pandemic, many individuals and businesses decided that it was time to move to greener, colder pastures. Those individuals and businesses left the state thinking that California was merely a state in their review mirror and that they had left high taxes and budget deficits behind. Such peace of mind might soon be a thing of the past.

The California Wealth and Exit Tax

Recently, there have been rumblings of a new tax that will be attached to those individuals or businesses within a certain income range who decide they no longer want to feel the sand between their toes.

Assembly Bill 259, known as the California Wealth and Exit Tax, was introduced into the state legislature in January 2023. The bill was born of a desire to protect the state from the loss of taxes resulting from the exodus of these companies and individuals—and to recuperate some of the state tax breaks, business benefits, infrastructure support, etc., that had been given to them as incentives to move to or stay in the state.

Assembly Bill 259 was also a reaction to a loophole in the current capital gains tax. Intangible assets, such as stocks, crypto, retirement accounts, etc., are assets that travel with the individual and business. Even if those intangible assets were originally created in the state of California and the financial institution holding them is in the state of California, the domicile for the assets travels with the individual or business. Thus, an individual or business can avoid paying taxes on these intangible assets by moving out of state and establishing a new domicile. Assembly Bill 259 sought to close that loophole by designating as California residents the owners of these intangible assets, even if those individuals or businesses have left California and established domiciles outside of the state; thus, those intangible assets remain California assets and are taxable as such.

The Wealth and Exit Tax would apply to individuals or businesses that have been full-time residents of California and hold wealth over $50 million; it would tax 1 percent of wealth up to $1 billion and 1.5 percent of wealth over $1 billion at the time of their exit. Usually, individuals or businesses that are considered part-time or temporary residents get taxed at a lower rate and not on their worldwide income amounts; however, this one-time tax would be based on worldwide net income and would apply to full-time, part-time, or temporary residents if those individuals or businesses meet the wealth thresholds.

Obstacles to Enactment

What could possibly go wrong, you ask? Well, there could be an issue with those pesky Commerce and Due Process Clauses of the U.S. Constitution. California would be attempting to impose additional taxes on individuals who have clearly established a domicile outside the state, and they would be singling out individuals who decide for personal or business reasons that they no longer wish to reside in the Sunshine State.

Further, the state of California would somehow have to guarantee that it applied the tax only to wealth generated in California when the individuals or businesses had been residents there. Based on the current proposal, many suspect that the exit tax may be too broad and an exaggeration of state power.

Despite such obstacles, California is not usually a state that gives up.

Coming to a State Near You?

Now, many of our readers may think, “Well, why do I care about a proposed California Wealth and Exit Tax? I do not live in that state, and I have no investments or income-generating activities in that state.” Well, would it interest you to know that nine other states have a similar proposal working their way through the legislative process? Or that a federal exit and wealth tax has already been passed as law? As evidenced so many times before, trends that begin in California frequently spread across the country. Merely look at the enactment of California Assembly Bill 5, known as the “Gig Worker Bill,” which not only upended employer-employee relations in the state of California but also inspired similar bills in other states and even at the federal level. So, if you are looking to exit your home state with a high net worth, we recommend that you keep your ear to the ground and monitor the progress of this Sunshine State proposal—and plan your exit strategy accordingly.

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Allison D.H. Soares

Vanst Law LLP

Allison D.H. Soares ([email protected]), a partner at Vanst Law LLP, is a tax attorney who helps individuals and businesses with tax problems, including audits, collections, and international compliance. She has represented hundreds of clients before the Internal Revenue Service (IRS), Franchise Tax Board (FTB), Employment Development Department (EDD), and California Department of Tax and Fee Administration (CDTFA). She is also an adjunct professor at San Diego State University.

Lauren Suarez

Of Counsel, RJS Law Firm

Lauren Suarez ([email protected]), of counsel with RJS Law Firm, is a San Diego native with a passion for tax. She has worked on both the tax controversy side and the tax preparation side for businesses and individuals and has advised clients on various domestic and international tax planning, preparation, and controversy issues related to the Internal Revenue Service (IRS), Franchise Tax Board (FTB), Employment Development Department (EDD), and California Department of Tax and Fee Administration (CDTFA).

Published in GPSolo eReport, Volume 13, Number 6, January 2024. © 2024 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. The views expressed in this article are those of the author(s) and do not necessarily reflect the positions or policies of the American Bar Association or the Solo, Small Firm and General Practice Division.