California’s wealth tax proposal could be a roadway to more tax proposals that impact high net worth individuals. The Unger Company works to minimize, offset or avoid these taxes for clients.
One of the more interesting stories of 2023 we are watching at The Unger Company Ltd. is the introduction of wealth tax legislation at the state level. These measures have been introduced, so far, in eight states: Connecticut, New York, Maryland, Illinois, Washington, Minnesota, California and Hawaii.
Let us state up front: We don’t see there being a great chance of these measures passing state legislatures, being signed into law, and being implemented without a serious legal challenge any time soon. However, these measures are of concern to our clients and potential clients, especially those in these eight states, so we are keeping an eye on them.
The measure in California has garnered some national attention. The bill, CA AB 259, has been introduced in the State Assembly by Alex Lee, who represents a district in Silicon Valley. The measure introduced by Assemblymember Lee would apply a tax of 1.5 percent on the worldwide assets held by a resident of California whose wealth is greater than $1 billion. The calculation is complicated, but it has the potential to impact ultra-high net worth individuals (UHNWI) who live in the state, so it is important for this group to monitor the legislation.
The introduction of the measure is being spearheaded by a progressive political organization called the State Innovation Exchange, which is coordinating efforts to introduce similar legislation in all eight states.
The first question that anyone should rationally ask is: What is the chance that these measures become law? While The Unger Company isn’t in the business of forecasting political outcomes, given the track record of measures like this or similar tax measures that have recently failed on the ballot, like Proposition 30 in California, we don’t believe the wealth tax will pass both houses of the state legislature and be signed into law by Governor Gavin Newsom. We could be wrong, but we believe the odds are stacked against this.
Let’s start by looking back at Proposition 30, which failed by a huge margin during the 2022 midterm election. Proposition 30 was a measure that would have added a tax of 1.75 percent on Californians earning more than $2 million annually. The measure failed by a margin of 58-to-42 percent in November. Californians are thought to be sympathetic to such measures that promise ideals like tax fairness; however, this outcome indicates to us a wind blowing against the passage of a wealth tax.
Governors, state senators and others with greater political ambition are unlikely to harm some of their biggest donors, who may be forced to relocate to a state that is a tax haven. This is a very big consideration, which will likely turn the sympathies of high-ranking politicians against such a measure. Back to Proposition 30, Governor Newsom came out strongly against it, which helped to defeat the measure. Newsom is term limited, so if he decides he wants to run for the U.S. Senate or President, he will need those deep pockets to bankroll his campaign.
Finally, in the case of California, the measure requires a two-thirds majority, and we don’t believe that there is a broad enough base of support. While the most left-leaning members of the state’s Democratic caucus would be likely to support a wealth tax, mainstream liberals, moderates, and conservatives from either party would overwhelming oppose the measure, leaving the measure with nowhere near the 67 percent it would need to successfully pass the Assembly.
We have a high-level of confidence in our position that wealth tax measures will not succeed today or in the near future, but we do have to sound a note of caution. These bills are a harbinger that there is an appetite among self-identified progressives to continue to introduce legislation targeting high net worth (HNW) and ultra-high net worth (UHNW) individuals, and this can come in the form of a wealth tax or more punishing estate and income taxes.
The Unger Company is advising clients to assume a defensive posture and to at least begin considering moves that would be beneficial should any new, enhanced taxes pass that could require greater asset protection strategies. If you have not been in touch with us, we believe a call would be prudent. The Unger Company will work with your legal and financial advisors to implement an elegant and efficient plan for you. Call us at 212-755-4777 or contact us here at your earliest opportunity.
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Harold Unger LinkedIn: https://www.linkedin.com/in/harold-m-unger-9453aa73/
The Unger Company Ltd. LinkedIn: https://www.linkedin.com/company/93617123/
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