Are “Savings Taxes” on the Horizon?

California legislators have proposed tax hikes—again, reprising failed tax bills from 2020 and 2021—that could collect an extra $22 billion in annual tax revenue for the state’s coffers[1]. If passed, California would be the first state in the country to impose a “Savings” or “Wealth” tax—though Washington state is currently considering a similar proposal[2] atop their new capital gains tax effective January 1, 2022.

California Assembly Bill 2289 would impose a new tax of 1.5% upon the “worldwide net worth” of California’s millionaires.  As proposed, this bill would come into effect in 2023 for billionaires and in 2025 for Californians with a net worth of $50 million or more.

While proponents may be quick to point out that this is only a tax for the very wealthy, critics, like Reform California Chairman Carl DeMaio, say that every taxpayer needs to worry.

“Just as they did with the Income Tax when it was first imposed more than a century ago, once the Savings Tax is created, it will quickly be expanded to include everyone,” Reform California Chairman Carl DeMaio said.[3]

Remember—this is not about income, but about accumulated wealth. And it’s not about a discreet event such as death, where estate tax kicks in. This could be an annual tax, which introduces significant complexities around declaring assets (a list of 18 categories of assets would need to be reported separately to the Franchise Tax Board every year!)[4]

Taxing assets rather than income also means major valuation and line-drawing exercises. Critics have noted how vastly difficult a wealth tax could be to administer. How do you value assets, and who decides? Percentage interests in legal entities such as partnerships, LLCs, and hedge funds would evidently have to be valued, and so would interests in businesses. If you are a Californian who owns 25% of a company in Ohio, the company in Ohio may have to cooperate too. In short, valuation would be complex and involve judgement calls, and it could potentially burden non-California businesses too.

As proposed, California Assembly Bill 2289, worldwide net worth could not include any real property directly held by the taxpayer. With this bill, a taxpayer’s worldwide net worth shall also not include any tangible personal property directly held by the taxpayer and located outside of the state. However, worldwide net worth shall include the value of real property or out-of-state tangible personal property held indirectly, as through a corporation, partnership, limited liability company, trust, or other such legal form, except to the extent that such inclusion is prohibited by the United States Constitution or other governing federal law.[5]

According to Kristi Mathisen at Laird Norton Wealth Management, tax management for investing will be even more important as people seek to offset gains with losses, or rethink where appreciating assets are held within various portfolios such as retirement plans, trusts, or regular investment accounts, for example.[6]

On the bright side, even if enough lawmakers back the bill, the law also will require special approval from voters to get around California’s tax-rate limit of 0.4%.[7]

However, proposals like these likely will prompt many residents, business owners and property owners to consider—once again—if the benefits of working and living in the Golden State outweigh the hassles and burdens.

For more information about passive real estate investments, please call 1031 Capital Solutions at 1-800-445-5908 or visit our website, 1031capitalsolutions.com.

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This is for informational purposes only, does not constitute as investment advice, and is not legal or tax advice. Because investors situations and objectives vary this information is not intended to indicate suitability for any particular investor. Please consult the appropriate professional regarding your individual circumstance.

This material is not to be interpreted as tax or legal advice.

Investments in securities involve a high degree of risk and should only be considered by investors who can withstand the loss of their investment. Prospective investors should carefully review the “Risk Factors” section of any prospectus, private placement memorandum or offering circular.

The data contained in this material was obtained from third-party sources believed to be reliable; however, 1031 Capital Solutions, CIS, and CAM do not guarantee the accuracy of the information.

[1] Forbes, California Proposes 16.8% Tax Rate & Wealth Tax…Again, Time To Move?, May 1, 2021

[2] The Center Square, State wealth tax would target ‘worldwide wealth’ of Washington billionaires, February 2, 2022

[3] 600KOGO News Radio, California Could Be First State to Impose a “Savings Tax”, February 28, 2022

[4] Bloomberg Tax, California’s Latest Wealth Tax Proposal: An Overview of AB 310, May 6, 2021

[5] California Globe, Amended Wealth Tax Bill to Impose 1% Upon the Worldwide Net Worth of CA Residents Worth Over $25M, March 26, 2021

[6] GeekWire, Controversial capital gains tax spooks wealthy Washington residents as some unload their stocks, December 9, 2021

[7] Los Angeles Times, Another effort to tax ‘extreme wealth’ in California is launched in Legislature, February 18, 2022

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Securities offered through Concorde Investment Services, LLC (CIS), member FINRA/SIPC. Advisory services offered through Concorde Asset Management, LLC (CAM), an SEC registered investment adviser. Insurance products offered through Concorde Insurance Agency, Inc. (CIA) 1031 Capital Solutions is independent of CIS, CAM and CIA.

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