May 19, 2024

How To Prepare For The Proposed California Exit Tax

California has long been one of the primary destinations for internal and international migration in the United States. The Los Angeles metro area was the principal driver of this population explosion, growing from just over two million in the post-war era to well over 18 million people today.

This is quickly beginning to change, however. Since around 2019, California’s population has shockingly begun to shrink, losing people in droves to states like Texas, Arizona, and Colorado.

Migration has traditionally been the backbone of California’s population growth, but the 2020s have seen a reversal in this trend where the state is losing far more people than it is taking in. The problem has become acute enough that the state actually lost a federal representative, a first in its 173-year history.

So, what is causing this population outflow? While each individual leaving the state has their own reasons, the decision usually comes down to politics, economics, or a combination of the two.

Demographically, the population moving out is typically young and college-educated, which is a troubling sign for a state hungry for workers. This population segment that had been the primary demographic moving to California is now being pushed out by the meteoric rise in costs of living and a political situation that seems unlikely to change.

Forty percent of those moving out of the state have stated that politics was a primary driver in the decision. The state’s liberal attitude towards spending and taxation has begun to take a toll on its popularity, with many successful young people choosing to take their resources elsewhere.

Unfortunately for them, the state does not appear to be willing to let those resources slip away. The state has recently proposed a wealth tax on residents with a net worth of over $50 million – no surprise for a fairly liberal state. What is a surprise, however, is the exit tax add-on.

Usually reserved for citizens choosing to give up their citizenship, an exit tax is a tax on an individual’s net worth upon leaving a governing body. While it is unusual for a state to punish those choosing to leave, California’s outmigration appears severe enough for the state to take drastic measures.

California’s proposed exit tax would allow the state to continue taxing previous residents for several years after leaving the state. The exit tax would take 1% of a previous resident’s net worth over $50 million or 1.5% of their net worth if its over $1 billion.

The proposed bill is already facing criticism and pushback from legal experts and business leaders all over the country. If passed, the bill will likely come under scrutiny from federal authorities over whether or not it violates the interstate commerce clauses contained within the constitution.

With tens of thousands of wealthy residents still fleeing the state, the legislature seems poised to move forward with the bill, though its fate in federal court afterward is anyone’s guess. This leaves California residents planning to leave the state in a state of uncomfortable uncertainty.

The best way to deal with uncertainty is to prepare for the worst and begin planning around having to live with an exit tax. This means hiring an expert team of tax attorneys who can help you navigate the proposed legislation and leave the state worry-free.

For San Diego residents, Hone Maxwell is one of the region’s preeminent tax attorneys, successfully assisting both international and domestic clients through some of the most complex taxation cases imaginable. The firm has followed the proposed wealth tax since its inception and stands ready to help prepare their clients for the road ahead.

While California remains a popular destination for tourists, residents continue to sour on the high costs of actually residing in the state. For those who are ready to leave but need to ensure they won’t run afoul of the state’s tax authorities, we highly recommend getting in contact with Hone Maxwell. Call today:

Hone Maxwell

+16199804476

3465 Camino del Rio S #400, San Diego, CA 92108