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.