All Episodes
Previous Next
Jan. 15, 2021 - Epoch Times
22:12
California’s Heavy Tax Increase On The Wealthy; Financial Impact On Residents | Hank Adler
| Copy link to current segment

Time Text
If this proposal goes through, what can happen?
What would be the impacts?
What we're seeing is an exodus of individuals in California who have great wealth.
When they leave, their employees leave with them.
So do you think there will be a net loss if people leave?
Net loss is probably an understatement.
And so the average people that don't have this wealth, how are they going to get impacted?
There's going to be less money for the state.
As the wealthy person leaves, as jobs leave, those are the people who are paying most of the taxes.
And you mentioned that they were going to follow people as well.
Yes.
What the bill says is it says, I'm a California resident and I'm going to move to another state after the wealth tax is put into place.
That the wealth tax will follow me over the next 10 years.
There's a component of this bill that wants to tax people that are here for 60 days or more.
So if you look at this wealth tax, they would be trying to tax everybody who's here for short periods of time.
Even Canadians.
Is that going to cause people not want to come here?
I would think so.
And the compliance issues become enormous.
You know, we're just seeing too many big companies leave California right now to close our eyes and say we haven't reached the point of no return.
California is considering a wealth tax that would impose a tax increase on permanent and temporary residents that stay in the state for more than 60 days, and even a 10-year look-back provision for former residents.
My guest today is Hank Adler.
He's an associate professor at Chapman University.
Today, he discusses the effort to impose a heavy tax on the wealthy and the financial impact on the state.
Welcome to California Insider.
Thank you.
I'm pleased to be here.
I want to talk to you about taxes in California.
There was a proposal on wealth tax that's coming back.
Can you tell us more about it?
Sure.
Last summer there was a proposal, this is really the second time around, to put a significant tax on the wealthy people of California based upon their wealth.
Died in committee early, late December, and is supposed to reappear as a proposal sometime this spring.
You mentioned it's a significant tax, but it's only 0.4%.
How does it work?
Well, if you multiply 0.004 times really big numbers, you get a really big tax.
The example I like to use, because I've never met the man, is Zuckerberg.
You know, if he's worth $100 billion, then.004 would be a $400 million tax.
So he would be exposed annually to $400 million.
And of course, he doesn't have $400 million in quarters and nickels in his garage.
So he'd have to sell assets.
So for him, the cost of a $400 million tax, this.004, could probably be close to $800 million to a billion dollars.
And how is that going to impact the state?
So the state needs money.
Is that the reason they're doing?
Well, I think it's twofold.
The state clearly needs money.
I mean, we have enough social issues in this state.
The funding is just going to be difficult for a long period of time.
We probably don't spend our money very wisely unless you want to take a train to Fresno.
Well, we have a need for money, but I think it's twofold.
I think when you see these kinds of taxes, on one hand, probably the majority of the discussion is how are we going to raise money?
But I think there's a percentage of the discussion, I can't prove this, but I think there's a percentage of the discussion that there's really some significant wealth envy going on for these hyper, hyper, hyper wealthy individuals.
Can you explain this wealth envy?
Well, I'm jealous.
You know, regardless of liquidity, if somebody's worth $100 billion, they can do anything that they want.
You know, Zuckerberg is alleged, at least I believe he has, you know, funded campaigns for different elective offices.
It's hard to see the wealth diversity, the difference in the amount of money that people have.
I understand that envy.
And now, do you think if this proposal goes through, what can happen?
What would be the impacts?
Well, I think it would be horrible.
And we're seeing it already, both with the proposal and with their, there's another proposal out to take the top rate in California from 13.3 to I think it's 16.8%.
And what we're seeing is an exodus of individuals in California who have great wealth or expect to have great wealth.
To some extent, when they leave, their employees leave with them.
We've had the two recent notices.
Elon Musk is moving to Texas and Ellison, I think that's the way he pronounces his name, is moving to Lanai, which I guess he owns, which is wealth envy to the max.
So the income taxes for that individual leave, the wealth taxes never get collected.
We'll talk about the 10-year string they have in this proposal.
And people who have great jobs who are paying taxes, you know, extensively will move to new jobs in other states.
So it costs the state a lot of money.
I mean, it's Difficult to think about the number of people who would leave.
Oh, and there's the other one.
HP is going to move to Texas.
How many jobs are going to move with HP out of Silicon Valley?
And they're all high-paying jobs, which means they're all high-paying taxpayers.
And so do you think there will be a net loss if people leave, or is it...
Well, I think net losses is probably an understatement.
I think it will be fewer wealthy people will want to move here and we'll see huge net losses of both wealthy people and jobs.
I've not practiced.
I've been in academia now for 18 years, so I've not practiced in a long, long time.
I get a couple calls a month today from people who say, well, Hank, How do I get out of this state?
I'm about to have a big transaction in a year or two.
California doesn't have a capital, special capital gains rate.
What do I need to do to no longer be a resident of California?
If I'm getting a couple calls a month and I don't practice anymore, you can imagine that every CPA in the state is getting those calls every day.
People are leaving.
And so the average people that are watching this show that don't have this wealth, How are they going to get impacted?
Well, they're going to be impacted.
That are in California.
Yeah.
The California resident who stays, and I'll certainly be one of them, There's going to be less money for the state.
You know, as the wealthy person leaves, as jobs leave, those are the people who are paying most of the taxes.
In California, and I'm not going to quote your percentage, but a spectacular percentage of income taxes paid in California are paid by the upper 1%.
It's something like 50%.
So when they leave, Taxes go down.
Tax revenues go down.
When tax revenues go down, the ability of the state to fund itself declines.
And you mentioned that they were going to follow people as well.
Yes.
Can you explain that?
Sure.
Let's assume...
Well, let's take HP, which I've never done any work for, so I can talk about.
Let's assume HP is moving to Houston, I believe.
So how many jobs does that mean are going to move from California to Houston?
Let's assume it's two or three thousand, hundred thousand dollar a year jobs.
All of the revenues, all of the tax revenues from those people who have moved to Houston are going to go away.
All of those revenues are going to move to another state where there is no income tax.
So they'll all be net ahead.
And what about the idea of following people, these wealthy people, for years, right?
There's an idea in this proposal, right?
Yeah, something we've never seen the like of.
What the bill says is it says, I'm a California resident.
And I'm going to move to another state after the wealth tax is put into place.
That the wealth tax will follow me over the next 10 years.
So what does that mean?
That means, let's assume I'm Zuckerberg and I don't leave in time.
For the next 10 years after I leave California, I'm going to be subject to this wealth tax at a declining percentage.
So in the first year I'm out of the state, I would pay 90% of the wealth tax instead of 100%.
It would go down 10 percentage points a year.
There are a large handful of constitutional issues with that proposal.
Does California have the right to tax a resident of another state on the wealth that that individual had when they were in California?
I'm not a constitutional scholar, but I would doubt it.
There's a component of this bill that wants to tax people that are here for 60 days and more.
Can you explain that?
Yeah, the bill basically defines a partial year resident, that's not the language they use, to be somebody who's here for 60 days.
So that, you know, if Bill Gates arrives in California, he's got a home in Palm Desert, and he stays there for 60 days, he's going to be subject to 60 divided by 365 times the.004.
I've played with those numbers, it's like a million dollars a day for Mr.
Gates to be in California.
It's not going to happen.
And, you know, the tax doesn't hit anybody until they've got a net worth of $30 million.
That's a big, big number.
Those people are probably more portable than anybody else.
So you'll see, you know, I think you'll see movement.
You know, if nothing else, when dad's ready to go to a rest home, Dad's going to go to a rest home in Nevada.
Because then he'll avoid these increases in taxes.
And you were mentioning there's an impact on certain regions.
People that come here, they have vacation homes.
Yeah, I would assume that the California side of Tahoe and Palm Desert in particular would be hit.
What percentage of those people in Palm Desert are from Canada?
Because California It makes two distinctions.
They distinguish between residents and non-residents.
So there's no difference between a Canadian who spends 60 days in Palm Desert or an American who spends 60 days in Palm Desert.
So if you look at this wealth tax, they would be trying to tax everybody who's here for short periods of time.
Even Canadians, is that going to cause people not want to come here?
I would think so.
And the compliance issues become enormous.
I mean, how do you find those guys?
How do you know who was here for more than 60 days?
And then the other side of the compliance issues, and you asked me the question, well, 004 seems like such a small number, and it is.
Let's assume we have an individual who's worth $31 billion.
So his tax is going to be.004 times a million dollars.
I think that's about 40,000 bucks.
How much is he going to have to spend to get all of his assets appraised to pay a $40,000 tax?
I mean, that's pretty outrageous.
You know, and everybody isn't a stock portfolio.
You know, certainly my old clients, you know, a $30 million net worth, you know, you might have buildings all over the world.
What if somebody has the 30 plus million dollars net worth, but it doesn't have the money?
You know, because people have businesses, people have different types, and he's not generating any income.
That's the norm.
That's the issue.
You know, liquidity is an important component of a wealthy man's life, wealthy person's life.
And today, nobody wants to have money on the sidelines.
They want to have it invested.
So, you know, if that hundred million dollar man has to raise a billion dollars, They're going to sell assets.
And if it's not a public company, it gets pretty difficult to raise that kind of money year after year after year.
I mean, the Zuckerberg example, if you assume it's a billion to get 400 million, if he wants to stay here a decade, We're talking about $800 million to a billion dollars that he has to raise.
He's going to sell assets.
Could lower the value of the stock market individually.
I don't think so.
I don't think those companies are that big.
But for the quote-unquote average person who's got a $50 million business, there's no reason to think they can raise that money.
Now, why do you think the California legislative body even discuss this type of bills or bring this type of bills in front?
Is it that they think that this is going to work?
This is going to generate money?
You know, I don't know for sure.
The only CPA in the entire California legislature was not re-elected, John Moorlach from Orange County.
Which we had him on the show.
He was talking about the pension liabilities here.
Yeah, the wonderful guy.
Long-time friend.
I don't know that they really have input from all sides of the equation.
I watched the committee meeting on some form of Zoom live when they were discussing the wealth tax.
And it was fascinating.
The room was set up for 12 or 15 members of the committee.
And Morlock was on the committee and the chairman, I don't know who the chairman was, the two of them were there for the whole time.
And maybe one or two other individuals from the legislature came to the meetings.
And the way it worked was they gave five minutes to two people on each side, pro and con, for the wealth tax.
And I really thought three of the four did a good job.
The fourth, she wasn't really briefed on what the wealth tax was.
She thought that she just needed more revenues for her nonprofit.
And then for, until I got tired, they took input from the audience and it generally went like, hi, I'm Bob Smith and I'm with so-and-so and we're in favor.
End of discussion.
So I don't know that, in the answer to your question, I don't know that there was any deep discussion, you know, where people sat around a table and exchanged ideas.
Do you think there has been any studies done or any deep research on the impact of I haven't seen anything.
The touchstone for the wealth proposals in the United States right now are two professors from Berkeley, Professor Zayez and Zuckman, two brilliant guys, no question.
They are the, I think, the finest obtainers, if that's the right word, researchers of wealth disparity probably in the world.
And they're supplying the underlying data of how much money could be raised.
But I think it's a fixed equation.
I don't think that they've looked at how many people would leave, what would be the impact, what the individual would do.
And I'd love to meet with those guys.
They seem like pretty good guys.
They'll answer an email overnight.
So, the people that brought this bill ahead forward, they discussed that people won't leave because they already raised taxes one time and people didn't leave as a result of it.
And they think if they do it this time, people will still continue.
Yeah, I'll give you the example, you know, specifically to the guys who call me, this is pre-wealth tax.
You know, let's assume that you've been very successful and you've built a business and you're going to sell it two or three years out.
And currently you have a 20% tax for federal, you have a 13.3% tax for state.
It cuts a lot of money.
I spent my whole life building this business.
And if I move out of California before I sell that business, and I'm really no longer a resident, lots of rules to be to accomplish, but I'm no longer a resident, I can make that 13.3% tax go away.
People are doing it.
You know, we're just seeing too many big companies leave California right now to close our eyes and say we haven't reached the point of no return.
My opinion.
And do you think people, those government officials that are in charge right now, do you think they care about people leaving?
Do you think they are paying attention to it?
I assume they care.
I think it is, It's difficult to accept that I'm going to raise taxes and it's going to reduce the amount of California revenues that are going to be collected.
I don't think there's uncaring, terrible people in the legislature that are behind this kind of legislation.
I just don't think they realize the impact.
Do you think it's easier to raise taxes than actually fixing, creating that tax revenue in other more fundamental, better ways?
Of course.
Of course.
I mean, because every activity in the state has sponsors.
So any activity that you want to reduce or change to the reduction, you're going to get feedback.
You're going to get a pushback.
We have this huge pension issue in California, and I'm one of these people who believes if we promise the pension, we should pay it.
But that doesn't mean we shouldn't change it and fix it on a go-forward basis.
You keep your promises, but maybe you take a harder look like business has as to whether you can have the same kind of pension opportunities in 2020 that you promised in 1968.
But it's very difficult.
I mean, just imagine those words I just said coming from somebody running for re-election on how much money would flow into the opponent's coffers to defeat them.
What do you think has to take for the people in Sacramento to actually take that hard look?
And make the decision to actually balance our spending versus our revenue, our income.
I don't think I know the answer to that question.
I mean, at some point, if we continue to raise taxes, and if companies start to leave the state in greater and greater numbers, and there's some velocity growing, I don't think that's in dispute.
At some point, they're going to have to do the cuts because they're just not going to have the money, they're not going to have the borrowing power to do it.
How long that would be, you know, is it remedable after it happens?
I'm the wrong guy to ask that question to.
I don't know.
And what do you think the average Californians can do to ensure that the people that they're electing are actually doing these hard, making these hard decisions?
What do they have to do?
Well, I'm not sure I know the answer to that question.
It would be nice to have a level playing field in terms of the expertise that's in the legislature.
I mean, to have a legislature that has an absence of financial experts should scare the heck out of us.
Conversely, do I want to be district whatever and be forced to vote for a CPA? That's ludicrous.
So it's a hard question.
I don't know the answer to that.
But it'll play out.
I mean, at some point, if the revenues go down and we have to cut expenditures and walk away from crazy things like the train, citizens will express their displeasure when the events take place to cause that displeasure.
And what do you think is the likelihood for this to pass?
I would think at the legislature level, pretty small.
But if you ask me if we put it on the ballot, I think it would have a decent chance.
It scares me to death.
But it seems like such a small number until you realize the impacts that those taxes would have.
There are other ways to play the game.
So do you have any other remarks for our audience?
No, not really.
This has been fun.
Thank you so much.
Good, thank you.
▲
Export Selection