New Wealth Tax Proposal in California in Assembly Bill 2289

On February 16, Assembly Member Alex Lee, along with co-authors Assembly Members Wendy Carrillo, Ash Kalra, Luz Rivas, and Mark Stone, introduced Assembly Bill 2289 to create a wealth tax in California. The bill would amend Section 12651 of the Government Code, and add Section 19573 to, and Part 27 (commencing with Section 50301) to Division 2 of, the Revenue and Taxation Code. The bill requires a 2/3 vote for passage out of both houses of the Legislature.

Section One of the bill would amend Government Code Section 12651, California’s False Claims Act, to apply the FCA to tax cases by applying its provisions to Part 27 (commencing with Section 50301) of Division2 of the Revenue and Taxation Code only if the damages pleaded in the action exceed $200,000.

The Attorney General or prosecuting authority would be required to consult with the taxing authorities to whom the claim, record, or statement was submitted prior to filing or intervening in any action under this article that is based on the filing of false claims, records, or statements made under the Revenue and Taxation Code.

In addition, the Attorney General or prosecuting authority, but not the qui tam plaintiff, would be authorized to obtain otherwise confidential records relating to taxes, fees, surcharges, or other obligations under the Revenue and Taxation Code needed to investigate or prosecute suspected violations of this subdivision from state and local taxing and other governmental authorities in possession of such information and records, and such authorities are hereby authorized to make those disclosures.

However, this subdivision would not be construed to have retroactive application to any claims, records, or statements made under the Revenue and Taxation Code before January 1, 2023.

Section Two of the bill would add Revenue and Taxation Code Section 19573 under the Personal Income Tax Law provide that the Franchise Tax Board (FTB) may, upon request, disclose returns or return information to the Wealth Tax Advisory Council or the University of California for use in research related to compliance with or administration of the Tax on Extreme Wealth. Data shared under this section may be matched or otherwise combined with other sources. The FTB would be required to establish procedures relating to requests from the University of California for specified information sharing.

Section Three of the bill would add Part 27 (commencing with Section 50301) to Division 2 of the Revenue and Taxation Code. Part 27 would be titled, “Wealth Tax,” and be cited as the Wealth Tax Act. There is a legislative finding and declaration that the intention of the Wealth Tax Act is to provide revenue to be expended for the purpose of advancing California towards meeting the conditions set forth in subdivision (b) of Section 1 of Article XIII B of the California Constitution.

NOTE: This is an incorrect reference because there is not a Section 1(b) in the current state Constitution. However, ACA 8 (the companion measure to AB 2289) would create a Section 1(b) in Article 13B, but ACA 8 has to first pass the Legislature and be adopted by the voters before creating that subdivision.

There are also definitions provided for the terms “dependent,” “GAAP,” “Internal Revenue Code,” “person,” and “related persons.” The collection and administration of the Wealth would be governed by existing law in the Revenue and Taxation Code.

The Wealth Tax is due at the same time as the annual income taxes of a taxpayer are due. The FTB is required to create or amend forms for the reporting of certain assets. Every taxpayer who is required to file a California tax return is required to either declare their worldwide net worth is less than the exemption threshold or report worldwide net worth. There is a list of 18 categories of assets that must be reported separately.

The provisions of Part 27 are severable so that any invalidity does not affect other provisions or applications that can be given effect without the invalid provision or application.

Chapter 2 would be added and is titled, “Imposition of Tax on Wealth.” This new law applies to tax years beginning on or after January 1, 2023, and before January 1, 2025, on the activity of sustaining excessive accumulations of wealth as a resident.  There would also be imposed an excise tax of 1.5 percent upon the worldwide net worth of every resident in this state in excess of:

• For married taxpayers filing separately, $500,000,000.
• For all other taxpayers, $1,000,000,000.

For tax years beginning on or after January 1, 2025, there would be imposed an excise tax of 1 percent upon the worldwide net worth of every resident in this state in excess of:

• For married taxpayers filing separately, $25,000,000.
• For all other taxpayers, $50,000,000.

In addition to the tax imposed above, there would also be imposed an additional 0.5 percent surtax, for a total combined tax rate of 1.5 percent, upon the worldwide net worth of every resident in this state in excess of:

• For married taxpayers filing separately, $500,000,000.
• For all other taxpayers, $1,000,000,000.

Worldwide net worth would be calculated in the manner set for calculation of the Federal Estate Tax in the Internal Revenue Code. “To the extent allowable under the constitution, worldwide net worth would be the value of all worldwide property owned by the taxpayer on December 31 of each year.” And, any transaction with a primary purpose of reducing the valuation of a taxpayer’s worldwide net worth as of December 31 would be disregarded.

Worldwide net worth could not include any real property directly held by the taxpayer. Worldwide net worth shall also not include any tangible personal property directly held by the taxpayer and located outside of this 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.

Any assets of a person who can be claimed as a dependent that are in excess of $50,000 are to be deemed to be assets of the taxpayer who can claim them as a dependent. Also, a taxpayer’s worldwide wealth must include any asset transferred by the taxpayer to a related party, or otherwise to any party under circumstances in which the transferor remains in control of or directly benefits from the transferee’s use of the transferred asset.

The Franchise Tax Board is required to adopt regulations on specified subjects to clarify valuation methods. In addition, the FTB would be required to adopt regulations and appropriate forms on the specified subjects to require information reporting.  Liquidity-based Optional Unliquidated Tax Claim Agreements, to be referred to as LOUTCAs, would be governed by specified rules.

There would be allowed as a credit against the tax imposed by this part an amount equal to the amount of net-worth wealth tax paid to another jurisdiction relating to assets subject to the tax imposed by this part. There would be rules for claiming the credit and separate reporting requirements.

The value of directly held real or personal property excluded from calculation of a taxpayer’s worldwide net worth shall be reported on the taxpayer’s annual return, along with any liabilities secured by or used for the benefit of directly held real property. Liabilities secured by or used for the benefit of directly held real property shall not be considered in determining worldwide net worth of a taxpayer.

The Franchise Tax Board would be required to adopt regulations for apportioning taxpayer’s overall liabilities to exclude liabilities related to directly held real property. These regulations shall provide that, at a minimum, a percentage of each taxpayer’s overall liabilities, equal to the percentage the taxpayer’s directly held real property interest bears to all of the taxpayer’s worldwide assets, shall be excluded from the calculation of the taxpayer’s worldwide net worth.

For purposes of Part 27, a taxpayer is considered a resident for a given year if that taxpayer is a resident as that term is defined under existing law. Similarly, a taxpayer is a part-year resident for purposes of this part if that taxpayer is a part-year resident as that term is defined in existing law. In addition, temporary residents would be taxed on their worldwide net worth according to this part, but for purposes of calculating that tax, the taxpayer’s wealth tax liability would be multiplied by the percentage of days in the year the taxpayer was present in the state.

A taxpayer who is subject to the tax imposed under this part with an understatement of tax for any taxable year would be subject to the penalty imposed under this section if that understatement exceeds the greater of either $1,000,000 or 20% of the tax shown on an original return or shown on an amended return filed on or before the original or extended due date of the return for the taxable year. The penalty would be equal to 20 percent of any understatement of tax. However, the penalty would be 40 percent of any understatement of tax if that understatement was substantially the result of not reporting an asset required to be separately listed. There would be certain exceptions from this penalty.

The Franchise Tax Board would be authorized to hire and pay reasonable fees to any outside experts or outside counsel as appropriate and to help fully administer and collect the Wealth Tax.

The False Claims Act would apply to claims, records, and statements made under or pursuant to this part, but only if the damages pleaded under that action exceed $200,000.

The Wealth Tax Advisory Council would be established. It would determine an adequate level of annual funding and staffing for the administration and collection of a wealth tax enacted by the Legislature, including at the Franchise Tax Board, Office of Tax Appeals, and the Department of Justice. It would make suggestions to the Legislature as to modifying the Wealth Tax in order to improve its fairness and efficiency. It would develop objective metrics for determining progress towards meeting the conditions. It could also hire consultants to help in the preparation of the methodology and annual reports.

In addition, there would be in the State Treasury the Franchise Tax Board Wealth Tax Administration Fund. The funds would be continuously appropriated to the Franchise Tax Board to be used solely for the purpose of administering and collecting a wealth tax. A minimum of $300 million would be appropriated each year for this purpose.

In addition, would be in the State Treasury the Department of Justice Wealth Tax Administration Fund. The funds would be continuously appropriated to the Department of Justice to be used solely for the purpose of administering and collecting a wealth tax. A minimum of $25 million would be appropriated each year for this purpose.

The Governor, the Treasurer, the Controller, the Legislature, and the Executive Officer of the Franchise Tax Board would each appoint one member to the council from each of the following three categories:

• A current or retired California revenue official.
• A taxpayer representative.
• A policy analyst or academic.

The members would serve eight-year terms and would serve a maximum of two terms, unless removed earlier. There would be rules for filling vacancies and when a term expires.

The Franchise Tax Board would be able to adopt any and all regulations that are helpful and appropriate for implementing any provision in this part.

Section Four of the bill specify that the provisions of Part 27 would only become operative if ACA 8 the 2021–22 Regular Session is approved by the voters and takes effect.

Section Five of the bill sets forth a legislative finding an declaration that the limitation on the public’s right of access to the meetings of public bodies or their writings is appropriate to protect sensitive information of California taxpayers.

Section Six of the bill provides that no reimbursement is required by this act pursuant to Section 6 of Article XIII B of the California Constitution because the only costs that may be incurred by a local agency or school district will be incurred because this act creates a new crime or infraction.