It is still early in the 2022 session of the California Legislature, which reconvened on January 3, and goes on final recess on August 31. However, a number of proposals to increase taxes are already under consideration. While such proposals are a regular feature of the California legislative and initiative processes, their presence this year is tempered by two developments. First, the State of California is flush with money. Indeed, on April 21, the California Legislative Analyst’s Office updated its Revenue Outlook for 2021-22 for the “Big Three” Taxes—personal income, sales, and corporation. It concluded its best estimate is there will be somewhere between $33 billion and $39 billion in unanticipated revenue. This is addition to the already rosy revenue estimates used in January of this year when the Governor’s office first proposed its budget for fiscal year 2022-2023 (which commences July 1). Second, this is an election year, with a major general election set for November. Many members of the California Legislature (both Senate and Assembly) are up for reelection and one would not expect many sitting legislators wanting to run in November on a platform of just having raised taxes. An April 15 poll by the Berkeley-Institute of Governmental Studies found that “about two in three voters (64%) consider the federal and state income taxes that they and their family already have to pay are too high. This represents a 10 percentage-point increase in the proportion of voters who said this six years ago, the last time a comparable question about income taxes was included in a statewide voter poll.”
Here are the current tax increase proposals to watch.
A Wealth Tax. We have seen a wealth tax proposal introduced in the last several prior legislative sessions, with none of those proposals gathering much support. The proposal this year is a combination of Assembly Bill (AB) 2289 and Assembly Constitutional Amendment (ACA) 8. This package has been labeled as a “Job Killer” bill by the California Chamber of Commerce, which states this tax increase “will drive high-income earners and job creators out of the State as well as the revenue they contribute to the General Fund.”
AB 2289 is a complex bill, but, in short, for tax years 2023 and 2024, it imposes a new 1.5% annual tax on a California resident’s “worldwide net worth” in excess of $1 billion, or in excess of $500 million in the case of a married taxpayer filing separately. For tax year 2025 and beyond, the tax would be changed to 1% of a California resident’s “worldwide net worth” in excess of $50 million (or $25 million for a married taxpayer filing separately), as well as an additional tax at a rate of 0.5% of a resident’s “worldwide net worth” in excess of $1 billion (or $500 million for a married taxpayer filing separately). High-wealth Californians who establish residency outside the state would continue to be subject to the tax for several years, based on a complicated formula outlined in the bill. Further, a nonresident “shall be subject to the tax…to the extent the nonresident has extreme wealth sourced to this state.”
“Worldwide net worth” is defined with reference to specific federal provisions and would not include specific assets, including personal property situated out-of-state, directly held real property, or liabilities related to directly held real property. However, it appears to include, but would not be limited to, art and collectibles, pension funds, financial assets held offshore, farm assets, mutual funds, index funds, and stocks. The potential annual “net worth” valuation issues presented by the proposal are enormous.
The bill specifies the wealth tax will become operative only if a specified constitutional amendment, ACA 8, is approved by a majority of voters in a statewide election and takes effect. ACA 8 was introduced almost one year ago, and has yet to be referred to a committee for its first hearing. Even if AB 2289 passed the Legislature, ACA 8 still would need to be placed on a statewide ballot and then be approved by a majority of the voters.
Capital Gains Tax on Short-Term Home Sales. AB 1771 would impose a 25% tax on capital gains from residential property purchased less than seven years prior to the sale. The bill reduces the imposed tax by 5 percentage points to 20% of the net capital gain on the sale or exchange beginning 3.01 to four years, inclusive, after the initial purchase of the property and continues to reduce the tax by an additional 5 percentage points each year thereafter, until the tax is phased out after more than seven years from the initial purchase. Under the current version of AB 1771, the bill would not apply to property used as a primary residence since the initial purchase of the property, or to any residential real property occupied as a principal place of residence that is eligible for a homeowners’ property tax exemption. The bill states that California’s median price for a single-family home increased 17% to $814,580 in the third quarter of 2021, while near-record lows of 42% of Californians could meet home-buying qualification standards. Further, prices of condominiums and townhomes are at an all-time high, reaching an average of $620,000 in November 2021 or 19.2% over 12 months. The author has stated the bill is intended to curb real estate speculation. As a tax increase, the bill requires a 2/3 vote. The bill would take effect immediately as a tax levy.
Two Personal Income Tax Increases by Initiative. Proponents are currently gathering signatures to place on the November ballot two initiatives, both of which would increase personal income taxes on high-income California taxpayers. The first measure is Initiative 21-0037A1, known as “The Clean Cars and Clean Air Act,” which would impose a personal income tax surcharge of 1.75% on a taxpayer’s taxable income in excess of $2 million for each taxable year beginning on or after January 1, 2023. The revenue would be earmarked for investments toward meeting climate change goals through cleaner transportation (including investment in electric vehicles) and by preventing and suppressing catastrophic wildfires.
The second measure is Initiative 21-0022A1, known as the “California Pandemic Early Detection and Prevention Act,” which would impose a personal income tax surcharge of 0.75% on a taxpayer’s taxable income in excess of $5 million for each taxable year beginning on or after January 1, 2023. The revenue would be earmarked to invest in technology to detect pandemics early, modernize local health departments and improve school infrastructure to reduce transmission.
What are the chances of success of any of these proposals? The wealth tax in AB 2289 and ACA 8 will not succeed in this session. The prior bills have found little support and the current proposal is finding little support this legislative session. AB 1771 on the capital gains tax is a fairly new bill and a bit of an unknown, but is already encountering significant opposition from those who argue it will only exacerbate the already tight California residential housing market. It likely will not pass in its current form. The two initiatives for personal income tax increases have been successful so far in gathering signatures and will likely gather sufficient signatures to qualify them for the November ballot, so the odds are high these measures will go to the voters. It is much too early handicap what will happen at the polls in November (assuming they qualify).