Assembly Standing Committee on Revenue and Taxation

All right, everybody, and good afternoon. Thank you for being here on time, Mr. Lee, and welcome to this hearing of the Assembly Committee on Revenue and Taxation. Before we take up our agenda today, I would like to welcome Assembly Member Gipson, who I am sure is on his way. He is the newest member of the committee. Additionally, I would like to welcome Assembly Member Joe Patterson, who will be filling in today for Assembly Member Ta for today's hearing only.

Pursuant to our Committee rules, bills with a fiscal impact of plus or minus $150,000 will be referred to our suspense file at the end of this presentation. To comply with legislative deadlines, we will be taking up the suspense file at the end of this hearing. We have one item on our agenda today, AB 259 by Assembly Member Lee, and we are going to start as a subcommitee. So, welcome, Assembly Member Lee.

Good afternoon, Madam Chair and Members. I want to thank you for allowing this hearing of AB 259. I'm presenting AB 259 today, which proposes to establish a tax on the wealth of individuals who have accumulated more money and assets than 99.9% of all people in the state.

This bill would affect less than 0.1% of people, people that live on the outer edge of the growing economic inequalities that we've seen. And almost all of the wealth of this group of people is essentially untaxed. Their wealth is not income. It is not growing due to their work. This wealth disparity grows because work is taxed. Income is taxed, your paycheck is taxed, but extreme wealth is not.

It is used for collateral loans to fund the lifestyle of the top 0.1%, the billionaires and mega millionaires, but it is not taxed. And as I've talked around to people about this proposal, I know one of the hardest parts about this is wrapping our minds around the enormity of the wealth involved.

A millionaire in our society is comfortable, largely secure for all the basics of life, nice house, or houses, even. More than enough food, expensive clothes, vacations, entertainment, and enough for their children. But to compare the scale of wealth we're talking about, I'll use comparison in time. A million seconds is 12 days. 50 million, which is where our bill starts, is 600 days or 20 months. And a billion seconds is 31 years. 100 billion second is 3,100 years.

That is the wealth level of the most famous people we know: Elon Musk, Jeff Bezos, Carlos Slim, those are some of the most rich people in the world. That's the difference between a millionaire, and with most of the comforts our society has to offer, and individuals that enjoy the most extreme wealth, they're not even in the same neighborhood, not even the same zip code.

And this wealth accumulation is increasing. As the Committee analysis notes, middle income households in 1970 owned 32% of aggregate wealth in the United States. This number has fallen to 17%, with upper income households now holding 79% of all wealth.

So this growth of wealth for the top 0.1% is increasing at a rate rarely, if ever, seen in human history. And this bill proposes to impose a modest wealth tax of 1% on wealth of $50 million. And when you graduate to the $1 billion level, it's 1.5%.

And I've known that there are concerns that have been raised that if a wealth tax is levied on the top 0.1%, that people just simply leave California. However, the historical data does not support this premise. The data says that higher wealth people have more likely to stay in California regardless of tax policy.

More recent trends show migration, but there's no evidence that is tied directly to taxation. In fact, I think a global pandemic that disrupted the entire society has more to do with it. I would submit that these social dislocations the past four years have a lot more to do with the pandemic than taxes. In fact, over the last few years, the amount of billionaires in California has actually grown. We have more billionaires in California than any other state in the country.

In fact, we have more billionaires here than any other place in the world, except for China. Here in the Legislature, we regularly debate bills to help the most vulnerable, how to help people working the hardest, least paid jobs, the jobs that we all depend on for essentials of life. Farm workers, fast food workers, grocery store workers, truck drivers, teachers, nurses, firefighters, utility line workers.

All these folks work every day, many living month to month, paycheck to paycheck, paying a higher proportion of income in taxes than the top billionaires. They rely on the collective services that our government provides, from road maintenance to light rail and buses, to safety, electricity, and pushing broader access to the internet and our schools, of course. And for the most vulnerable, we provide direct assistance with food, housing, and medical care.

And often you will hear me say that during times of scarcity and budget scarcity, the people at the bottom bottom are always going to be hit the worst. And this is the 99.9% of our society. And the gulf between those that work and sometimes struggle and those that own and never struggle is growing. It is true that the wealthiest pay a significant portion of the tax revenue that California brings in to fund our budget.

After all, they are the people with the significant portion of all the money in the entire society. However, that is not the full story. The story is that the wealthiest individuals have a true tax rate multiple times lower than working people. The average person's true federal tax rate is about 14%, while the wealthiest 25 people in the United States have a true tax rate of 3.4%. This is not proportionate nor fair, but it is entirely legal.

The wealthiest here build their fortunes with a robust and diverse economy. They own more and benefit more from the Golden State than anyone else. And yet, much of that wealth is untaxed. We wring our hands and argue about raising the minimum wage above $15 and paying our healthcare workers $25 an hour, and we debate how to help these people make society work.

And yet, can we move forward on the discussion on having the wealthiest top 0.1% billionaires and mega millionaires contribute a proportional share because they own and enjoy more of the benefits of our state than anyone else. This is a commonsense change, and I ask for your support when the Committee considers this bill. Thank you.

Thank you very much, Mr. Lee. I am going to have the Secretary call the roll, please.

Irwin. Here. Bains. Here. Gipson. Here. Grayson. Jim Patterson. Rivas. Joe Patterson. Here.

All right. A quorum has been established. I apologize for the disruption.

No worries.

You may have your, let's see. Now that we have the quorum, as a reminder, both support and opposition are allowed 2 minutes for the primary witness and each primary witnesses. And the secondary witnesses allowed 2 minutes also.

Good afternoon, Madam Chair and honored Members of the Committee. My name is Lacy Barnes. I'm a 32-year educator in California and the Secretary Treasurer of CFT, a Union of Educators and Classified Professionals. I respectfully urge your vote of yes on California Tax on Extreme Wealth, AB 259. CFT represents over 120,000 public and private educators across the state, from early childhood education through TK-12, community colleges, and the UC system. Our members engage California's households in a unique sense.

We know our students smiles, their laughter, their grief, their worries, their fear, and their pain. We dedicate our careers, not only to educate our students, but to help them and their families thrive. Since 2020 alone, ultra wealthy Californians have added over one and a half trillion dollars to their already staggering levels of wealth.

Meanwhile, CFT members have watched Californian students be denied opportunities to thrive every day. As one of the largest economies in the world, California struggles now to ensure appropriate educator-to-student ratios that would give every student the attention they actually deserve.

Children and young adults, our students, go hungry on a nightly basis. Parents cobble multiple jobs to afford basic needs, family going bankrupt from medical debt, veterans can't access needed services, and unhoused can't access adequate affordable housing. These are just a few examples in a long list.

You've seen the income scale. You've heard that CFT has targeted with this legislation. We're not talking about wealthy doctors, lawyers, engineers, or even small business owners who earn high wages. We're talking about folks who've amassed extreme wealth almost to levels never seen before in human history. Think of AB 259 as the teeny percentage catalyst that would spark game changing opportunities for all Californians. CFT urges you to vote yes on AB 259.

Thank you very much.

My name is Darien Shanske. I'm a Professor at UC Davis who worked on drafting this bill, and I am primarily here to answer your questions about how it will work. Let me start with giving a little bit of context before taking your questions.

So, the Governor is apparently not a fan of this proposal, but I do want to register that I am a fan of his budget proposal and that he's taking a broader multi-year perspective on the budget and adopting some revenue raisers, like conforming to the federal corporate tax on specific provisions.

Now, we talked about this last winter in connection with the Corporate Alternative Minimum Tax, something which I would still urge this committee to do. It's a low hanging fruit. Now, why is that a low hanging fruit? Because it's a tax expenditure. Because the corporate tax is porous and it allows well-heeled taxpayers to not pay the same amount of taxes as other people. I would urge the committee to think about this proposal through the same lens. Most Californians lucky enough to have wealth are subject to a small wealth tax on most of their wealth.

It's called the property tax, right? Why should those who have the most wealth, but typically not in the form of real property, not pay a similar small amount on their intangible wealth? Or consider, through the lens of a different tax, the personal income tax.

California, appropriately by my lights, asks those with higher income to pay more, but it fails to ask those with the most income to do more because they don't earn regular wage income. This bill is one kind of solution to this problem. There can be others. A mark to market tax could be administered within the income tax and would tax currently untaxed gains. Some worry such a tax would be volatile. This could be addressed through taxing half of capital gains every year.

Such a tax, if implemented now, could be understood as a prepayment of future capital gains at an important moment in order to smooth the budget cycle. The main concerns of this proposal, to impose a small tax on extreme wealth, as I understand them, relate to administrability and mobility.

In short, as to administrability, most of the assets subject to this tax, shares in public companies, are readily valued. The remaining assets are subject to straightforward formulas. The apparent complexity is primarily caused by anti-abuse rules and taxpayer-friendly deferral options.

As for mobility, the best evidence does not indicate that there would be a large mobility response. Furthermore, such response as there would likely be, would be mostly results of people moving paper, not people, which is why this proposal includes robust anti-abuse rules. I look forward to your questions.

All right, thank you. Thank you very much. And I'm sure there will be questions for you after we hear from other witnesses in support. And I'll remind all witnesses you have 2 minutes. Excuse me, me toos.

Good afternoon, Chair and Members. Janice O'Malley with the American Federation of State County Municipal Employees in strong support. Thank you.

Happy New Year, Madam Chair and Members. Seth Bramble here on behalf of the California Teachers Association. We are in support.

Good afternoon. Jessica Hay with the California School Employees Association in support.

Honorable Chair and Members, Amy Hines-Shaikh with Wild Cat Consulting, representing Share Collaborative Housing in strong support. Thank you.

Good evening. Johan Cardenas with the California Pan-Ethnic Health Network, and we're in strong support. Thank you.

Fatima Iqbal-Zubair with California Environmental Voters in support.

Monica Madrid, Sacramento, California. Constituent, citizen, taxpayer in support.

Brandon Knapp representing California Tax Reform Association in support.

Ivan Fernandez, California Labor Federation, in support.

Diana Douglas with Health Access California, in support.

Neel Sannappa with the California Working Families Party in support.

Thank you very much. And do we have any witnesses in opposition? And again, each of you will have 2 minutes.

Good afternoon, Chair and Members. Peter Blocker with the California Taxpayers Association, representing a broad coalition of taxpayers and associations opposed to AB 259. Highlighted multiple times this morning in the Governor's Budget Summary, is that the state is significantly dependent on revenue collected from a very small subset of taxpayers. Revenue collected from personal income tax represents roughly two thirds of all General Fund revenues, and just 1% of California's total tax returns were responsible for half of all personal income tax paid by residents in 2021.

So it's very apparent that under this bill, it would take a very few number of taxpayers to start to have a material effect on the budget. Californians subject to a wealth tax could easily move to any of the other 49 other states that do not impose one.

Taking with them their income, investments, charitable donations, and consumer spending. Entrepreneurs would be dissuaded from investing and growing their businesses in the state. We believe if enacted, a wealth tax would result in less revenue for the state and have a detrimental impact on the state's economy.

And if, despite these warnings, you believe wealth tax in theory is a good idea, in practice it is nearly impossible to administer, as this bill demonstrates. Under this legislation, taxpayers and the FTB would face substantially increased administrative burdens.

Both parties would have to calculate a taxpayer's wealth annually, which would be a costly and imprecise task. Taxpayers and tax agencies would be mandated to provide valuations of things that may be impossible to accurately appraise on every personal effect, including a privately held company and works of art.

This would lead to more disputes between taxpayers and tax agencies, which would add to the administrative costs and burdens for both. This bill also creates a trailing nexus that would subject former California residents who leave the state to a new tax, even if they are no longer present or connected to the state whatsoever. This acts effectively as an exit tax, which makes this bill ripe for constitutional challenges on multiple grounds. Taxpayers could argue that the state is attempting to deter residents from leaving in violation of the constitutional right to travel.

They could argue that nonresidents who no longer have nexus with the state, this tax would place a large impermissible burden on interstate commerce. And without any connection between taxpayers and California, taxpayers could challenge the law for violating the due process clause of the US Constitution.

As I'm sure most of you saw this morning, the Governor addressed this proposal multiple times during his budget press conference and stated that in no way would a wealth tax become law in California. We agree with the Governor that this bill is not something the state should consider, and we urge you to vote no on AB 259. Thank you.

Thank you.

Honorable Chair, Members, good afternoon. My name is Rob Lapsley. I'm President of the California Business Roundtable, and I'm here in strong opposition on behalf of a broad business coalition to AB 259. This proposal would send a clear signal to California's businesses, high income earners, that it is a time to move out of the state, and it will further destabilize our budget system through increased revenue volatility. Earlier today, again, the Governor presented his budget proposal with a $37.86 billion shortfall.

Now, we all know that California's financial stability is based on a small percent of high-income earners. In 2020, about 13,000 individuals contributed a staggering 37 billion, or 25.8%, of the total state personal income tax. In addition, California and this Legislature just passed new taxes that have already gone into effect this year. From legislation last year, California removed the wage limit on employee payroll taxes. So, for the state Disability Insurance Fund.

So now we have a top income tax rate for high income earners already that has increased by 1.1% effective 10 days ago. This is a tax on all Californians making more than $153,000 a year. So, in addition, Social Security wage base increased 5.2% for 2024. So now that means an additional $500 plus, and this applies across the board. So we're sending signals, Members, Honorable Chair, again, that California is looking to tax at all levels.

That is creating volatility, that is creating interest in moving. And that is what we're seeing. As the Governor said this morning, we're heavily dependent on capital gains, and the downturn is coming in this year's budget projections from the performance in the stock and real estate markets and the virtual collapse of the tech IPOs last year.

It's all related. There was a study by the Stanford Institute last year for economic policy research that recognized the exodus of businesses and residents to other states spurred by our high cost of living is now creating a real clear and present danger to our job market and fiscal health.

The recent US Census data reveals that states like Arizona, Washington, Nevada have become beacons for California residents, and more will move if this bill passes. That's unquestionable. Our population has declined for the third straight year, with a loss of 75,000 residents from 22 to 23. Again, that's Census Bureau data. So, Members, Honorable Chair, when we look at this, you are in the position today that you're going to send a signal throughout this country because that's what's going to reverberate in the media.

And if you pass this bill, you're going to be sending a very clear signal that California is interested now and intent on wanting to tax the net wealth across the board at every level. And the high-income earners, as Mr. Lee described, are watching for that signal.

We have talked to them. And so, with that, we appreciate the Governor's comments today on his opposition to this bill and to a wealth tax in general. He understands all this, and we stand ready to support him in his opposition. We ask for your opposition as well. Thank you.

Thank you very much. Do we have any other witnesses in opposition?

Good afternoon, Madam Chair. Skyler Wonnacott on behalf of the California Business Properties Association in opposition.

Scott Kaufman, Howard Jarvis Taxpayer Association in opposition.

Madam Chair, Members, Alex Torres on behalf of the Bay Area Council in opposition.

Dennis Albiani on behalf of the Family Business Association, we oppose. Thank you.

Jason Fox of the California Society of Certified Public Accountants in opposition.

Thank you. Preston Young from the California Chamber of Commerce here today in opposition.

Hi. Meg Snyder on behalf of the California Building Industry Association, opposed.

All right, very good. Do we have any questions or comments from the Committee? Mr. Patterson.

Thank you very much. And sorry for you guys drawing the shorts drawn, having me sub here today, but thank you for the opportunity. Thank you. Assembly Member Lee, I'd like to ask your witness had mentioned something about the property tax being a form of wealth tax, and I've actually said that myself in the past. So if somebody owns like a $10 million house, which, hey, look, when I grow up, I hope I own a $10 million house. Right now, I live in the suburbs, tract home. Does this proposal contain some kind of credit, or would you recommend some kind of credit for the person who owns a $10 million house?

Real property is excluded from the base of this tax.

All right, great. On that note, in the academic world, is there a cap on sort of the amount of taxes that California residents, that they should bear?

That's an interesting question. I mean, academically, I suppose you mean is something like the Laffer Curve, right? Is there a point in which you raise less money than, tax rates are so high that you raise less money through having taxes that high. I would say the overwhelming evidence is that no state is anywhere near that point on the Laffer Curve. In terms of the tax that this tax, it would be a 1-2% tax on property. So about what everyone else, we're all paying on our houses. So there's room for policy dispute for sure, but the notion that this would push us over the Laffer Curve, I don't think that's seriously.

So we're just scratching the surface.

I mean, this is a substantial tax, and it should be taken seriously. But it doesn't mean that there is some limit out there that we're theoretically approaching.

So one more question. If real property is exempt, what would stop people from investing in real property and exacerbating our housing crisis?

Well, I mean, there are a few interesting points. One is, since real property is already subject to a 1-2% wealth tax in California and, in other states, substantially more than that wouldn't make a lot of sense to try to avoid a 1-2% wealth tax by investing in the one asset that is already across the country subject to 1-2% wealth tax. And, in a state like New York or New Jersey, 3% based on real market value, not the sort of Prop 13 values. So I wouldn't see that as a particular problem.

Well, I would like to say that I think it's a misnomer that property tax in California is capped between at 1%. A lot of people, such as myself, we pay a lot higher as a result of Mello-Roos and things like that, which, by the way, was created to, is an alternative to Proposition 13 to help generate revenue from new construction.

But we've been reading a lot about what I've seen, and I'm the Vice Chair of the Housing Committee, and concerns about hedge funds and wealthy people purchasing single family residences, allegedly driving up the prices of rent and things like that, which the evidence doesn't actually suggest that that's what's raising the price of housing. We have a supply problem, but under this bill, someday, like I said, when I grow up, I want to be a billionaire. I think there's a song about that, but I think that I would invest all my money in real property.

As I said, I don't have an additional answer to that. I don't see why investing in the one asset class subject to a wealth tax would help you. I agree with you completely about the supply problem, and I applaud what the Legislature has done. And I have a whole bunch of ideas that we can talk about in terms of how to increase housing supply that are not related to this.

All right, well, thank you for being here. And Assembly Member Lee, I'm sure you expected me to be on the fence on this particular bill. During the last California budget crisis, between about 2008 and 2011, I was actually a staff person here, and for a period of that time, I worked for the Republican leader back when there was a big five, not a big three.

And I remember actually, one of my jobs was tasked with going out and sort of researching the volatility of our taxes here in California and just the percentage of the amount that the wealthy. Look, I'm not crying about the billionaires. They're going to do just fine. I'm not crying about the Hollywood elite having to pay into this. I think they'll be okay. But I am very concerned about the ramifications of people, by the way, who aren't necessarily wealthy.

They haven't actually, especially in the technology world, they haven't actually gotten this wealth yet. And so I have a lot of concerns about that, but also the volatility. I mean, we're seeing it today. The Governor actually showed a slide today about the income tax volatility in this state. And I don't believe that there are enough taxes that this state can collect to make the supporters of this bill comfortable, and whatever, the laugh. Look, hey, I'm an elected official.

I don't know about this curve and all that kind of stuff, but I don't think there's enough taxes to make happy the individuals with all the government desires that we have. And so I think we really have to look at stabilizing. This isn't going to create stability in our tax code. I have a lot of concerns about this. This is an item where I stand with the Governor. I think there are very few items like that.

But I commend the Governor today, and we are going through this process. But the reality is, I think we know this isn't going to make it all the way through the process. I appreciate the conversation, but this isn't going to become law, partly because we have a Governor who's already expressed opposition to this. So thank you very much.

Do we have other questions from the Committee? Mr. Lee, would you like to close?

Yes, I would just like to bring up to the point that, yes, volatility happens because we rely on the income tax of very few. But the fact of the matter is the wealth, the value of high net worth individuals is stable. In 2023, last year, the 186 billionaires, only 186 of them in the state, their wealth grew by $270 billion, that's almost the entire state budget, in one year.

Sure, there'll be years where Jeff Bezos or Elon Musk or whoever rich person you can think of, their wealth does not grow as fast. But it is growing. It is stable. 1% on a stable growth is much better than the volatility of income tax, if you were to even think of that way. That's why I think it's an interesting argument when opponents say our tax base is too constrained to too few already. Well, I'm hearing the opposite implication, that we should broaden it.

We should say that middle class people and working class people should pay more. Why don't we just get rid of Prop 13? Everyone pay wealth tax, right? Is that what I'm hearing from the opposition? Because if you want to spread out the tax base, then you spread it out to more people who have less money.

But I'm looking at the people who have so much money and avoid paying taxes. And I respect the opposition's argument. But when you talk about someone who's making $153,000 a year, when you talk to a 50 million a year or a billionaire, they might as well be making two cents a year. There's an incomprehensible difference in category.

And when the opposition conflates people who are doctors, engineers, or my constituents, who also have a lot of equity and who also work in tech, they are nowhere compared to the billionaires of today. And our progressive taxation system is not the cause of the worries. The volatility and the things that we're scared about, it's a reflection of income inequality, of wealth inequality, and as the rich get super, super rich and the poor get worse and worse and off, that's why we rely on so few people.

We're becoming, today, less and less democracy of equals, of a middle class society, an aristocracy that our founders said we didn't want, a nobility. And we're becoming that. So when the opposition comes and says don't tax the billionaires, it's going to come after people who make 50k year. It's ridiculous. And that's why I hope that you'll continue this conversation. And it is a very targeted way to make sure that we have $20 billion more investment to protect the progress that us, as the majority, have made conscious efforts to protect the most vulnerable society. So I urge your aye vote when the time is right.

All right. Thank you. I do really appreciate your passion. And I agree with Mr. Patterson that we don't have much sympathy for the billionaires. I am acutely aware and highly concerned with the issues surrounding income inequality. And I'm also aware of California's budget challenges and the impact and the deficits it have on services and communities throughout the state.

At the same time, I think it is really important to acknowledge that our budget has grown to historic levels in just the last few years, from roughly 213 billion in 2019 to 300 billion in 2020. I think that we must act with a degree of fiscal prudence and seek to reduce volatility in our revenue streams.

Even if the long list of administrative issues identified by FTB were addressed, this bill targets individuals with the resources, technical sophistication, and flexibility to relocate and minimize or avoid any tax liability envisioned by this proposal. Given the recent trends of high income and highly educated Californians leaving the state at increased rates compared to other groups, I believe these trends will only accelerate.

California, as you said, already has a progressive income tax, and if enough wealthy individuals decide to leave this state in response to the enactment of this bill, it will seriously jeopardize our personal income tax receipts that are already increasingly reliant on our highest income earners. In 2022, 25% of the personal income tax revenues was derived with taxpayers with incomes of 10 million or more. In 2021, over 10% of the earners accounted for 72% of the state's personal income taxes.

The personal income tax, as you know, has accounted for roughly two thirds of our General Fund in recent years. To the proponents who continue to say that this bill is a panacea to our current budget challenges, I would say that that is misleading. If we enact this proposal right now, the voters would need to vote in a constitutional amendment, and FTB has stated that it would take at least three to four years to stand up a program of this size and complexity, and this does not even account for the legal challenges that would be inevitable. Even then, proposed revenues would fall short of meeting the anticipated revenues expected in future years, especially if more individuals leave the state during this period.

FTB estimates only 6.5 billion would be raised in the first year, a fraction of the 20 plus billion that we have seen claimed. Proponents of this measure often look to Europe for policy inspiration for wealth tax. However, the evidence gives many reasons for concern. In 1990, 12 countries in Europe had a wealth tax. Today, there are only three.

France's wealth tax contributed to the exodus of an estimated 42,000 millionaires between 2000 and 2012, among other problems, leading to its repeal in 2018. These countries all experienced the same challenges. The tax was difficult to administer. It distorted savings and investment decisions. It pushed the rich to take their money out of the taxing countries. And perhaps worse of all, it didn't raise the revenue that it was promised.

While I understand the proposal tries to incorporate lessons learned from these countries, the evidence in Europe suggests there will be significant challenges to pursuing this policy at the state rather than the federal level. For all these reasons, I have significant concerns with the policies and its potential impact on our state's competitiveness and future state budgets. And with that, this bill is referred to our suspense file. And at this point, we will take up the suspense file, and AB 259 will be held in suspense. And with that, the meeting is adjourned.