California Legislature Introduces Legislation for Higher Taxes on Wealth

This week California Legislature both introduced an amendment to the California Constitution to address the constitutionality concerns raised with respect to wealth tax legislation proposed last year and refreshed the Wealth Tax Act itself. The provisions of the refreshed Wealth Tax Act are virtually identical to last year’s failed legislation, but with higher rates: 1% to 1.5% rather than 0.4%.

If the Wealth Tax Act is enacted, a 1% tax would be imposed annually on a California resident’s worldwide net worth in excess of $50 Million (or $25 Million for married taxpayers filing separately), with the rate increasing to 1.5% if the worldwide net worth is in excess of $1 Billion (or $500 Million for married taxpayers filing separately). The tax would apply to full-time residents, part-year residents and temporary residents as well as to former residents who were, within the ten years prior to becoming a former resident, subject to the wealth tax. In each case, an apportionment formula would be applied to determine the fraction of the taxpayer’s net worth subject to the wealth tax based upon the number of years the taxpayer was a resident of California during the prior ten years.

The calculation of an individual’s worldwide net worth would include all assets other than directly owned real property and liabilities secured by the real property, although such real property and liabilities secured by the real property would be required to be listed on the wealth tax return. In contrast, real property owned through an entity such as a corporation, partnership, LLC or trust would be included in the calculation of worldwide net worth. Publicly traded assets would be valued at their end of year value.  The value of non-publicly traded assets would be estimated, subject to later reconciliation, and determined without any valuation discounts.

If the taxpayer is subject to a wealth tax in another jurisdiction, a credit against the California wealth tax would be available, as well as a credit for real property taxes with respect to real property owned through an entity which is included in the taxpayer’s worldwide assets. No credit against the wealth tax would be available for income, capital gain or other taxes paid.

A two-thirds vote of both houses of the California legislature and Governor approval is required for the Wealth Tax Act to become law. If the Wealth Tax Act does become law, it will take effect immediately. The Constitutional amendment requires voter approval to become effective.

On March 25, 2021, Senator Bernie Sanders introduced the For the 99.5 Percent Act which proposes to modify the federal estate, gift and generation-skipping transfer tax.  Read more about this proposed legislation here.

If you would like to discuss this proposed legislation and any planning in anticipation of this or similar legislation that may seek to change the current estate and gift tax laws, please reach out to a member of our Private Client Services group.