Last week, San Jose Democratic Assemblymember Alex Lee once again proposed a “tax on extreme wealth in California.” Under Assembly Bill 293, “extreme wealth” is defined as “households with net worths of more than $50 million.” If enacted, a 1 percent tax would be applied to wealth over $50 million, rising to 1.5 percent for wealth over $1 billion.
The San Francisco Chronicle reports that a companion measure, Assembly Constitutional Amendment 3, subject to voter approval, would “eliminate a cap on state revenue passed by California voters in the 1970s known as the Gann Limit.” Lee and his fellow Sacramento liberals have long desired to remove any restrictions in the state constitution limiting their ability to tax and spend people as they wish.
If successful, the wealth tax would generate an estimated $21.6 billion, a convenient amount for Sacramento big spenders given it is nearly the size of the $22.5 billion budget deficit projected by the Newsom administration.
Even if approved by the Legislature and voters – a VERY tall order given that the state is on the brink of recession and Gov. Newsom is likely to oppose the new wealth tax effort as he did last year – the history of wealth taxes in other countries show they simply don’t work.
As PRI’s Kerry Jackson and Wayne Winegarden wrote last year, “in 1990, 12 European countries taxed wealth; today only three do. The nine nations that abandoned wealth taxes did so because they are economically destructive, difficult to administer, and fail to raise sufficient revenue.”
One of Lee’s main arguments, as reported by Fox LA, is that “the ultra-rich are paying little to nothing by hoarding their wealth through assets. Time to end that.”
If you take a closer look at the numbers, most reasonable people would conclude that this isn’t the case. Jackson and Winegarden wrote, based on data from the nonpartisan Legislative Analyst’s offices, that taxpayers with returns greater than $1 million pay 39.6 percent of income tax revenues but account for just 19.4 percent of adjusted gross income, demonstrating the progressivity of the state’s tax system.
Consider that those targeted by a proposed wealth tax will have paid taxes on the income they have earned, the capital gains they have made from stocks or other investments, and sales and use, property, or excise taxes on any cars, homes, jewelry, or property through which they have invested their wealth. And when people invest their money in things like this, they are spending more in the economy, supporting other businesses and jobs, and generating significant tax revenue.
In perhaps the most honest statement he made when rolling out his legislation, Lee said in his press release that, “we’ve been losing our lower and middle-income residents that are being priced out of this state because they can’t afford the high cost of living.”
As we’ve documented at PRI with our past research on California’s outmigration problem, that’s not the fault of wealthy taxpayers not paying enough in taxes.
The reason they’re leaving is due to policies enacted over the years by state lawmakers that have created in California one of America’s highest tax burdens, the nation’s highest gas taxes, crushing burdens from state government-imposed energy mandates, out-of-control housing prices, and limits on entrepreneurship that make it difficult for people to earn a living as they wish.
If Lee and his liberal colleagues are serious about generating more tax revenue, perhaps that should be their focus – making life better for all Californians so they won’t want to leave.
Tim Anaya is the Pacific Research Institute’s vice president of marketing and communications.