The Proposed California Wealth Tax Bill

A wealth tax is a direct tax levied on an individual’s total net worth, which is the market value of all their assets minus any liabilities. Unlike an income tax that targets annual earnings from labor or investments, a wealth tax is assessed on the accumulated stock of wealth itself. California has considered implementing such a tax through proposed legislation aimed at taxing the net worth of the state’s wealthiest individuals. The core idea is to create a new form of taxation that operates alongside the existing personal income tax system, targeting accumulated assets rather than the flow of income within a given year.

Proposed Tax Structure

The most recent version of the proposed legislation, Assembly Bill 259 (AB 259), outlines a multi-tiered tax structure based on an individual’s worldwide net worth. The bill proposes an annual tax for individuals whose net worth exceeds $50 million, with the threshold lowered to $25 million for married taxpayers filing separately.

For taxable years beginning on or after January 1, 2026, the proposal would impose a 1% tax on a resident’s worldwide net worth that exceeds this threshold. An additional 0.5% surtax would be applied to any worldwide net worth over $1 billion, bringing the total tax rate to 1.5% for those assets. The surtax threshold for married individuals filing separately would be $500 million.

The bill also included a provision for an initial, higher tax rate for a two-year period. For taxable years starting on or after January 1, 2024, and before January 1, 2026, the proposal called for a flat 1.5% tax on worldwide net worth exceeding the $1 billion and $500 million thresholds. This structure was designed as an annual excise tax, calculated and paid with regular state income taxes.

Determining Net Worth

Under the proposed legislation, the wealth tax would be calculated based on a person’s “worldwide net worth,” which includes the fair market value of nearly all assets owned by the individual, regardless of their location. The definition of assets is broad and includes:

• Publicly traded securities like stocks and bonds
• Interests in privately held businesses, such as partnerships and LLCs
• Cash and deposits in financial accounts
• Retirement assets
• Valuable collectibles like art, antiques, and jewelry
• The value of real property held indirectly, such as through a corporation

The proposed legislation specifies that any real property directly held by the taxpayer is not included in the definition of worldwide net worth.

A challenge in this process is the valuation of assets not regularly traded on public markets, such as private company equity or art. The proposed bill authorizes the Franchise Tax Board to establish rules for valuing these illiquid assets. This would likely require taxpayers to obtain certified appraisals to substantiate the reported values.

Identifying Affected Taxpayers

The proposed wealth tax is designed to apply to individuals with substantial connections to California, primarily state residents. For the purposes of this tax, a resident is defined in the same way as for state income tax purposes, based on factors like where a person is domiciled and the amount of time they spend in the state.

The legislation also introduces new categories of taxpayers to capture individuals who might not meet the traditional definition of a full-year resident. It includes provisions for “part-year residents” and “temporary residents.” A part-year resident is someone who is a resident for only a portion of the year, while a temporary resident is defined as someone who spends more than a specified number of days in California during the tax year, even if their permanent home is elsewhere.

These definitions are intended to create a broad nexus for the tax. This ensures that individuals who benefit from California’s economy contribute even if they are not full-time residents.

The Part-Year Resident and Expatriation Rule

A component of the proposed wealth tax is its approach to individuals who cease to be residents. The legislation includes an “expatriation” or “lookback” rule that would continue to tax former residents for a period after they move out of state. This rule is designed to discourage high-net-worth individuals from leaving California to avoid the tax.

Under this provision, a former resident could remain subject to a prorated wealth tax for several years after their departure. The tax liability would be apportioned based on the number of years the individual was a California resident immediately preceding their move. This means that even after establishing residency in another state, a person could still owe wealth tax to California, with the amount gradually phasing out over time.

The calculation for this trailing tax would be based on the individual’s worldwide net worth, just as it would be for a current resident, but the amount owed would be reduced. This provision represents a departure from typical state taxation, which ends when an individual severs residency ties with the state.

Legislative Status and Implementation

The California wealth tax proposal was introduced in the state legislature as Assembly Bill 259 (AB 259), with Assembly Member Alex Lee as the lead author. The bill is associated with a proposed constitutional amendment, Assembly Constitutional Amendment 3 (ACA 3). This amendment would be necessary to authorize the legislature to impose a tax on personal property, a prerequisite for the wealth tax to be constitutional in California.

As of early 2024, AB 259 did not advance through the legislative process. The bill failed to pass out of the Assembly Revenue and Taxation Committee on February 1, 2024, and is no longer active. However, it could be reintroduced in a future legislative session.

If the bill were to be passed and the amendment approved by voters, its provisions had a proposed timeline. The initial, higher tax rate was proposed for the 2024 tax year, with the broader tax structure taking effect for the 2026 tax year. Implementation would be managed by the Franchise Tax Board (FTB), which would develop the necessary forms and regulations.