Governor Newsom’s January Budget proposal forecasted another historic surplus estimated to be approximately $45 billion. As 2022 marches on, that surplus continues to grow. Last week, the Department of Finance reported that California has collected approximately $16 billion more in revenue than expected during the first seven months of the 2021-22 fiscal year.
According to the department’s report, $6.206 billion of this total additional revenue is due to higher-than-expected Pass-Through Entity (PTE) elective tax payments under the corporation tax. Personal income tax revenue for the first seven months of the fiscal year was $9.17 billion above the forecast of $76.71 billion. Corporation tax revenue for the first seven months of the fiscal year was $7.99 billion above the forecast of $10 billion.
These numbers tell a clear story – California’s employers and entrepreneurs have economically succeeded in the face of the last year’s challenges, leading to another tax windfall for the state. Despite the eye-popping revenue and California’s historic financial projections, certain state legislators almost-predictably introduced an enormous tax increase bill.
On February 16, AB 2289, the Wealth Tax, was introduced. This is identical to last year’s Wealth Tax – AB 310 – a Job Killer, which was never heard in a policy committee. According to recent reports, an analysis conducted by UC Davis and UC Berkeley professors estimates that the measure would produce approximately $22 billion in state revenue annually. However, that number is highly variable considering many of the individuals who would be subject to the tax would likely leave to avoid it.
The Wealth Tax would impose 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. After 2025, 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).
AB 2289 contains provisions that claw-back taxes from Californians who left the state while taxing certain individuals who spend minimal amounts of time in California despite not living here. Additionally, the Franchise Tax Board would be expected to implement and enforce the new tax law.
As California’s budget surplus continues to grow, General Fund dollars can be allocated in a multitude of directions. This includes funding true universal health care coverage, restoring economy-driving tax incentives for California’s businesses, and historic Prop 98 spending for schools. Given the state’s current ability to spend on nearly any desired cause, the Wealth Tax is unnecessary, and legislators should focus on ways to spend the cash California currently has on hand.