The return of the foolish wealth tax

In California government, bad ideas are like nightmares. They keep coming back, even though they can’t survive the light of day.

One such idea is the “wealth tax,” a failed proposal that seeks to “reduce wealth inequality” by taking an annual bite out of the assets of people who are “obscenely ultra rich,” in the words of the author of the latest version of the bill.

Assemblymember Alex Lee, D-San Jose, complained that “there’s a whole other category of wealth where you just own things,” and income tax doesn’t capture a share of it. So he has re-introduced a proposal that would slap a 1% annual tax on the global assets of Californians with a net worth of at least $50 million, 1.5% on the holdings of anyone with assets of more than $1 billion.

The proposed legislation is Assembly Bill 2289, and it is supported by the California Federation of Teachers despite record spending on education in the current state budget. CFT president Jeff Freitas said in a statement, “California billionaires have increased their wealth astronomically since the beginning of the pandemic, while regular working folks have struggled to pay their bills.”

But the disparate impact of pandemic restrictions is only the latest justification offered for redistributionist tax schemes in California, which already has the highest marginal state income tax rates in the country. With a top tax rate of 13.3% on the highest-earning Californians, the argument that the rich are not paying “their fair share” is absurd.

When last year’s version of the “wealth tax” was under consideration, a report from the California Policy Lab on the alleged “CalExodus” noted that the top 0.5% of California taxpayers account for 40% of state income tax revenues.

Although the researchers said they found no evidence of a “pronounced” exodus from the state and “little” evidence that wealthy Californians are leaving “en masse,” they noted that “the choice of a single billionaire to leave the state could have an outsized effect on the state’s coffers.”

That makes an annual tax on the global assets of wealthy state residents a profoundly stupid idea. It is an engraved invitation for high-wealth residents to leave, and just as importantly, it’s a tremendous disincentive for entrepreneurs to locate their start-ups in California. That hurts job creation, and the lack of good jobs in the state worsens income inequality. California has the nation’s highest poverty rate, with more than 15% of state residents living in poverty.

The solution can’t be found in confiscatory taxation. It can only be found in broad-based economic growth. State leaders should be focused on fostering the conditions for job creation, instead of introducing counter-productive proposals dripping with stale leftist rhetoric.

To the frustration of progressives who support the idea of a wealth tax, the idea can’t get off the ground in progressive California. Last year’s version of the wealth tax bill never even had a legislative committee hearing. Governor Gavin Newsom has not endorsed the idea of further raising taxes on the wealthiest Californians.

One of the most visible California billionaires, Elon Musk, is today a Texas billionaire, having moved his company’s headquarters from Palo Alto to Austin. Texans will now have those high-paying jobs, and they’ll be paying the Texas state income tax rate of zero.

It’s a cautionary tale, or should be, for California lawmakers.