California Assembly Bill 2088 proposes a new Wealth Tax on High Net Worth Individuals

Assembly Bill 2088 (the “Bill”) would impose a 0.4% tax on residents with a worldwide net worth in excess of $30,000,000 ($15,000,000 for a married taxpayer filing separately).  The proposed tax, if enacted, would apply to residents, part-year residents, and temporary residents.  The proposed tax also applies a 10-year lookback period in taxing former residents who had been subject to the wealth tax in any of the preceding 10 years.

10-year lookback provision

The portion of a taxpayer’s wealth subject to the wealth tax is multiplied by a fraction, the numerator of which shall be years in residence in California over the 10 preceding years with 10 years being the denominator.  For taxpayers who have previously been subject to the wealth tax in one of the preceding 10 years but left the state and became a nonresident, the tax would decrease based on the number of years the taxpayer has been a nonresident.

Part-Year and Temporary Resident

Temporary residents are defined as those who stay in the state more than 60 days during the calendar year.  For part-year and temporary residents, the tax would apply proportionally based on the number of days they are in the state during the year.

Net Worth subject to Wealth Tax

Assets subject to the tax under the Bill includes, but not limited to:

• Stock in publicly and privately traded C-corporation
• Stock in S-corporation
• Interests in partnership and private equity funds
• Interest in noncorporate businesses
• Bonds and interest-bearing savings accounts
• Cash and deposits
• Farm assets
• Mutual funds and Index funds
• Puts and calls
• Debt securities
• Indirect interest in real property

Valuation Method

Assets with readily available market value will be used to determine the net worth subject to the tax.  For those assets without readily available market value, the Franchise Tax Board will adopt regulations that would clarify valuation methods.

Penalties

The Bill imposes 20% penalty for underpayments exceeding $1,000,000 or 20% of the tax due.

Take-away

It is anticipated that the passage of this Bill will face lot of challenges and push-back from Republican Assembly, as it requires two-thirds of votes for enactment.  However, high net worth individuals with connections in the state should monitor the legislative updates.