Shark Tank’s Kevin O’Leary went on CNN last week and made the case for how the policies in some states are making them “uninvestable.”  Not sure that’s a word, but he has a point. It’s worth watching.

What sort of policies is he talking about?  Wealth taxes, for one. The topic of wealth taxes at the state level has been top of mind since January when, as part of a coordinated effort, lawmakers in numerous states introduced a series of related bills, including:

  • California (A.B. 259): A 1.5 percent annual tax on worldwide net worth above $1 billion; starting in 2026 that threshold would drop to $50 million, taxed at 1 percent (with the $1 billion threshold and rate still applied);
  • New York (S.B. 1570): A new tax on unrealized gains for taxpayers with net assets over $1 billion;
  • Illinois (H.B. 3475): A 4.95 percent annual tax on unrealized gains held by taxpayers with net worth over $1 billion;
  • Washington (H.B. 1473): A 1 percent annual tax on the value of financial intangible assets (stocks, bonds, options, futures contracts) exceeding $250 million:
  • Arizona (S.B. 1353): A 1 percent annual tax on net worth over $50,000; and
  • Hawaii (S.B. 925): A 1 percent annual tax on net worth over $20 million;

Some of these bills are strictly messaging vehicles while others appear to be under active consideration. Either way, they signal that the effort to raise taxes on the wealth is gaining traction at both the state and federal levels and needs to be taken seriously.

And while state some lawmakers argue their bills were spurred by federal inaction, many instead see the effort as a superior alternative to a national law. That’s because, while the constitutionality of a wealth tax at the federal level faces serious questions, any limitation on the power of states to move beyond income to wealth taxes is much less clear and relies on the constitution of each state.

Focus on California

To explore these questions, Tax Notes hosted a webinar last week focused on California bill A.B. 259, a remarkably aggressive piece of legislation that would not only impose a new wealth tax on current California residents on the value of their worldwide holdings, but also extend the tax to former residents as well.  Can a state continue to tax wealthy individuals who no longer live there? Can it tax them on assets that reside outside the state?

Here’s Lee Sheppard, a Tax Notes Contributing Editor, commenting on the bill’s four-year clawback provision for former residents:

There are a whole bunch of take-it-or-leave-it mechanisms when you dig into this bill that say, pay the tax immediately or give us this lien here or take this formula here. If I as a taxpayer don’t have the option to get my own expert evaluation, or to dispute the state’s valuation, I have a due process problem.

…If you’ve got a hard-to-value, closely-held business and you take it out of the state, you are squarely into the Commerce Clause. Because the Commerce Clause is supposed to say, I can do business anywhere in the country without being held back by state orders, and without being discriminated against and taxed going in and out.

Jared Walczak, Vice President of State Projects at the Tax Foundation, added:

So now you have a temporary resident which is someone who isn’t there often enough in California to be a part-time resident, but still has what the state would term substantial nexus…those who now leave aren’t just being taxed on the wealth that was generated in California, but on wealth that continues to be generated out of that asset that they had in California.

So yeah, you do have some interstate commerce issues there, some some right to travel issues, I think due process as well.

Marginal Rates

The issue of marginal rates also came up. California has the highest marginal tax rates in the country. Upper income Californians pay a top rate of 13.3 percent. While the tax rates associated with wealth taxes appear small and relatively benign, they are anything but.  As Jared points out, a 1.5 percent wealth tax in California translates into a 16 percent marginal tax rate for an asset with reasonable rates of return:

We need to understand how big these taxes are. So, a 1.5 percent tax rate on wealth – it might seem small, but wealth and income are very different. Take, for example, an investment held for 10 years with a 10 percent annual rate of return. This is not particularly unusual. It would be worth 30 percent less with a wealth tax than without one. The effective tax rate, if we’re going to convert this into basically being an income tax, that’s a 16-percent rate.

So A.B. 259 would reduce the value of Jared’s fictional company by 30 percent by imposing an effective marginal rate hike of 16 percent on top – and this is the important point – of the 13.3 percent rate the state already imposes.  That’s 29.3 percent and it is added to existing federal taxes.  Add them all up and Jared’s business would pay effective rates of nearly 70 percent. That compares to a similar company located in Texas that pays half that amount. That’s the uninvestable part.

Sounds bad, but really it’s worse. The tax imposed under A.B. 259 applies when businesses lose money too.  In those cases, the business owners would need to dip into their savings or borrow against the value of the business, which has already been discounted due to the higher tax burden.  String together enough loss years and you can envision a nasty death spiral taking place. What used to be a thriving place of employment is now an abandoned hulk, with housing and labor advocates protesting the “irresponsible” owners.

Other Issues

Another criticism of any wealth tax regime is the lack of administrability. While publicly-traded assets are easy to value and easy to sell, how do you put an accurate price tag on private companies? Here’s Lee Sheppard again:

If the business grows in one year, and then bounces around – as these entrepreneurial kind of things do – I’m still going to hit the gains. So even when the taxpayer sells the whole thing and gets credits for wealth taxes along the way, [its valuation] is still going to bounce up and down…but you’re catching non-permanent upward valuations along the way. You’re basically making the government an equity owner in the business.

Recognizing the obvious challenge of producing an annual valuation of somebody’s worldwide holdings, A.B. 259 proposes a massive $300 million increase in the state’s tax enforcement budget.  Keep in mind, the bill is targeted at California resident’s worth more than $1 billion, so this new funding would to cover just a few hundred taxpayers.

It’s as if California lawmakers are intentionally trying to drive any remaining high-wealth taxpayers out of the state. As the Tax Foundation’s Jared Walczak points out:

We don’t have literature in this country on how much migration there’d be from a wealth tax because, thankfully, we have not had a wealth tax yet. But we’ve seen significant out-migration of high tax states in recent years, and we’ve seen significant migration into lower-tax states. We see States like New York, California, Illinois, and Oregon shrinking while Florida, Idaho, Texas, Montana, Arizona, North Carolina, and Utah; states like that are growing substantially.

IRS data shows the migration is particularly common among high earners. And we know from multiple studies that just a one percentage point increase in income tax decreases GDP by three percent over the next three years, while domestic investment falls by around 12 or 13 percent…People are going to vote with their feet, and these are the people who have the greatest ability to do so.

Proposals like the California bill raise privacy concerns as well.  A.B. 259 would require the state revenue department to collect and retain significant amounts of sensitive taxpayer information, much of it for assets held out-of-state and even out-of-country. Here’s Jared again:

Another aspect of this is that pretty much any business anywhere in the country – not just in California – that has an owner in California has to submit information to California. They have to submit net worth information about their business, asset information, ownership state percentages.  

You’re requiring all these businesses to submit all this information and then, unlike ordinary tax information that’s held highly confidentially, you’re not allowed to share this with the general public but employees of the University of California system can request this information with identifiable taxpayer information on it, and they can do things with it. And members of a wealth tax advisory commission can request this identifiable information. And yes, they’re not supposed to share the information but it’s easily leakable information.

Concerns about privacy are not theoretical. We’ve seen a number of high-profile leaks from the IRS and Treasury in recent years along with political activists consistently calling for the data collected under the Corporate Transparency Act – a database of information that has yet to be collected — to be made public.


If Kevin Leary is right and California is already “uninvestable,” exactly how would you describe it with A.B. 259 in place?  The bill would take hostility to investment and jobs to a whole new level.

We’ve written about the various problems associated with a federal wealth tax in the past, but Wednesday’s webinar provides a useful opportunity to rehash these points, particularly in the wake of increased action at the state level.

The bottom line for S-Corp members is that while these bills may not be going anywhere in the immediate future, there is clearly a growing movement that would directly harm family-owned businesses. As long as that threat remains we’ll be working to actively fight against it.