California Legislators Propose Wealth Tax

Chris Micheli
Chris Micheli is a Principal with the Sacramento governmental relations firm of Aprea & Micheli, Inc.

On the morning of August 13, Assembly Bill 2088 was gutted-and-amended an elections bill into a wealth tax. AB 2088 is jointly authored by Assembly Members Bonta, Carrillo, Chiu, Gonzalez, Kalra, Santiago, Stone, Ting, and Wicks. Assembly coauthors include Chu and Jones-Sawyer and Senate coauthors include Skinner, Durazo and Lena Gonzalez. In the new bill is an introduction statement that the wealth tax is “for the benefit of accumulating excessive wealth in this state.”

AB 2088 would add Part 27 to Division 2 of the California Revenue and Taxation Code, beginning with Section 50301. Part 27 would be entitled “Wealth Tax” as Section 50301 specifies that this new part of the Revenue and Taxation Code would be known and cited as the Wealth Tax Act.

The bill would impose a tax of 0.4% of a state resident’s worldwide net worth in excess of $30 million, or in excess of $15 million for married taxpayers filing separately. The bill defined worldwide net worth based upon reference to federal tax law. Worldwide net worth does not include specified assets such as directly-held real property or liabilities related to directly-held real property, pursuant to Section 50303.

In addition, Section 50303 requires the wealth tax to be reported with and be due at the same time as the annual income taxes of any resident personal income taxpayer. This is pursuant to Part 10, beginning with Section 17001, of the Revenue and Taxation Code. Section 50303 also requires assets to be reported separately including, but not limited to, the following categories:

  •     Stock in any publicly and privately traded C-corporation.
  •     Stock in any S-corporation.
  •     Interests in any partnership.
  •     Interests in any private equity or hedge fund.
  •     Interests in any other noncorporate businesses.
  •     Bonds and interest-bearing savings accounts.
  •     Cash and deposits.
  •     Farm assets.
  •     Interest in mutual funds or index funds.
  •     Put and call options.
  •     Futures contracts.
  •     Art and collectibles.
  •     Financial assets held offshore.
  •     Pension funds.
  •     Other assets, excluding real property.
  •     Debts other than mortgages or other liabilities secured by real property.
  •     Real property.
  •     Mortgages and other liabilities secured by real property.

Section 50305 imposes the wealth tax annually of 0.4% upon the worldwide net worth of every resident in this state in excess of:

  •     For married taxpayers filing separately, $15 million
  •     For all other taxpayers, $30 million

Worldwide net worth under this bill would be calculated in the manner set for calculation of the federal estate tax pursuant to Chapter 11 of Subtitle B of the Internal Revenue Code (IRC) in effect on June 15, 2020. The estate tax begins at Section 2011 of the IRC. Worldwide net worth is deemed to be the value of all worldwide property owned by the taxpayer on December 31 of each year.

In addition, any transaction with a primary purpose of reducing the valuation of a taxpayer’s worldwide net worth is required to be disregarded. The bill authorizes the Franchise Tax Board (FTB) to adopt regulations necessary to carry out these new statutory provisions including the valuation of certain assets that are not publicly traded.

AB 3088 requires the FTB to adopt regulation designed to prevent the avoidance or evasion of the wealth tax. And, in Section 50307, the FTB is required to adopt regulations to clarify valuation methods.

Section 50306 provides that worldwide net worth does not include any real property directly held by the taxpayer. However, worldwide net worth does include the value of real property held indirectly, as through a corporation, partnership, limited liability company, trust, or other such legal form, except to the extent that such inclusion is prohibited by the California Constitution, by the United States Constitution, or other governing federal law.

Pursuant to Section 50307, the Legislature presumes that any taxpayer subject to this wealth tax is not a liquidity-constrained taxpayer if the taxpayer’s hard-to-value assets are less than 80% of the taxpayer’s total net worth. The FTB must adopt regulations regarding substantiating who is or is not a liquidity-constrained taxpayer. But, “for the removal of doubt, the Legislature finds that most taxpayers subject to the Wealth Tax should not be found liquidity constrained.”

Pursuant to Section 50308, “the value of all assets subject to the Wealth Tax shall be reported annually, but any amount of net-worth wealth tax on those assets paid to another jurisdiction shall be credited against the Wealth Tax.”

Under Section 50310, a taxpayer is considered a resident of California for a given year if the taxpayer is a California resident for purposes of income tax pursuant to Section 17014. Part-time residents are determined pursuant to Section 17015.5, and their tax is based upon the percentage of days in the year that the taxpayer was present in California. For temporary residents, who are taxpayer spending more than 60 days in California but who are not residents, are taxed based upon the percentage of days in the year that the taxpayer was present in California.

Section 50310 also provides special apportionment rules for the wealth tax. Basically, the “the portion of a taxpayer’s wealth subject to the tax imposed by this part shall be multiplied by a fraction, the numerator of which shall be years of residence in California over the 10 last years, and the denominator of which shall be 10.” There is also a special rule for new residents, as well as for wealth tax residents. Section 50310 provides a petition process for an alternative apportionment method and a specified burden of proof.

Section 50311 authorizes an understatement penalty if the understatement exceeds $1 million or 20% of the tax shown on an original or amended return. The penalty amount is 20% of any understatement of tax and is in addition to any other penalties that are imposed under the law. There are exceptions specified in the bill including a change in law or the taxpayer reasonably relief upon written advice obtained from the FTB.

Finally, the bill requires the FTB to amend the PIT tax forms or create any other forms necessary for the reporting of certain assets under the new wealth tax. This is pursuant to Section 50303.

Section 50304 provides that if any provision of this bill is found to be invalid, unconstitutional or unenforceable, that determination does not affect any other provision of the bill that can be enforced without the use of the offending provision.

Because AB 2088 would result in a change in state statute that would result in a taxpayer paying a higher tax within the meaning of Article XIIIA, Section 3 of the state constitution, it will require a 2/3 vote of both houses of the Legislature in order to reach the Governor’s Desk.

AB 2088, if signed into law by Governor Gavin Newson, would tax effect immediately as a tax levy. This bill constitutes a tax levy and, therefore, under Article IV of the state constitution, it goes into effect immediately upon chaptering. This is contained in Section 2 of the bill.

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