What is the Newsom Wealth Tax Proposal in California?

A wealth tax is a recurring topic in California’s political discourse. Unlike income tax, which is levied on annual earnings from salaries and investments, a wealth tax is an annual tax imposed on an individual’s total net worth. This includes the combined value of all their assets, such as real estate, stocks, and personal property, minus their liabilities like mortgages and other debts.

Proposals for a wealth tax have been introduced in the California legislature multiple times to address wealth inequality and generate new state revenue. While frequently associated with Governor Gavin Newsom’s administration, such proposals have not become law and have faced opposition, including from the governor himself. The concept remains a subject of debate.

Key Features of the Proposed Tax

A prominent version of the wealth tax proposal was detailed in a bill known as Assembly Bill 259. This bill, though it did not pass, provides a clear framework of how such a tax might be structured. The bill stalled in a legislative committee in early 2024, preventing it from advancing.

The proposal outlined a phased implementation. For its initial two years, the bill called for a 1.5% tax on a resident’s worldwide net worth exceeding $1 billion, or $500 million for married taxpayers filing separately.

Following that initial period, the tax would have shifted to a multi-tiered system. This structure would have imposed a 1% tax on worldwide net worth greater than $50 million, or $25 million for married taxpayers filing separately. An additional 0.5% surtax would have been applied to net worth exceeding $1 billion, or $500 million for separate filers.

Defining Taxable Worldwide Net Worth

The foundation of the proposed wealth tax is “worldwide net worth.” For a California resident, the tax is calculated based on the total value of all their assets, regardless of where those assets are physically located or legally held. The calculation begins by summing up all assets and then subtracting all outstanding liabilities to arrive at the final net worth figure.

The range of assets included in the calculation would be comprehensive, including:

• Financial assets like stocks, bonds, and cash held in bank accounts
• Real estate holdings, whether personal residences, vacation homes, or investment properties
• Ownership stakes in private companies and patents
• Valuable personal property like art, jewelry, and other collectibles

A central challenge is the valuation of assets that are not publicly traded. While stocks have readily available market prices, assets like private equity interests or unique art require specialized appraisals to determine their fair market value. Deductible liabilities include mortgages on real estate, personal loans, and other forms of debt.

Taxation of Former Residents

A widely discussed component of the California wealth tax proposal is its approach to taxing individuals after they have moved out of the state. The legislation included a provision to capture tax revenue from former residents for a specified period, often referred to as a “look-back” period, to prevent tax avoidance through relocation.

The mechanism would function as a “trailing tax,” applying to former residents for up to a decade after they cease to be California residents. The amount of tax a former resident would owe would be determined through a pro-ration formula. This calculation is based on the number of years the individual resided in California during a specific timeframe leading up to their departure. The longer the residency, the greater the portion of the wealth tax they would be required to pay.

This provision is distinct from taxing non-residents on income they earn from California sources, such as from a business or property located in the state. It seeks to tax the worldwide net worth of former residents based on their prior connection to California, a concept that has raised questions regarding its constitutionality and the right to travel between states.