California is once again pushing a sweeping tax overhaul that would dramatically raise the burden on high‑income residents and businesses. The latest proposal, known as constitutional amendment ACA 11, would add multiple new taxes and surcharges with the goal of generating roughly $163 billion annually—more than the state collected in any pre‑pandemic year.
What the proposal entails
| Component | How it works | Estimated impact |
|---|---|---|
| Household surcharge | A flat increase of $12,250 per household (targeted at incomes above $159,509) | Raises revenue directly from middle‑ and upper‑income families |
| Top marginal income tax | New top rate of 18.05 % on wage income, up from the current 13.3 % | Would be about 3.5 × the median top marginal rate of 5.3 % across U.S. states |
| Payroll tax | Additional tax on employees earning more than $49,990 annually | Extends tax liability to virtually all working residents |
| Gross receipts tax | 2.3 % on business revenue, exempting the first $2 million of income | Roughly nine times Ohio’s 0.26 % gross receipts tax; adds a corporate‑level levy beyond the existing 8.84 % corporate income tax |
Together, these measures are designed to fund a single‑payer health‑care system and other state programs, though critics note that the additional revenue is unlikely to translate into tangible improvements such as expanded infrastructure or reduced congestion.
How California’s rates compare
- Top marginal rate: 18.05 % (proposed) vs. 13.3 % current. The next highest state rates are around 11 % in Hawaii, New York, New Jersey, and D.C.
- Median top marginal rate nationwide: 5.3 % – California would be over three times higher.
- Gross receipts tax: 2.3 % vs. Ohio’s 0.26 % (the highest pure gross receipts tax in the country).
Potential ripple effects
- Migration trends: California has already seen record numbers of high‑income residents leaving for lower‑tax jurisdictions such as Texas, Florida, and Arizona (though Arizona recently raised its own taxes on incomes above $250 k).
- Business climate: The combination of a high corporate income tax, a new gross receipts tax, and a franchise‑type fee that the state has historically levied creates multiple layers of taxation for companies.
- Long‑term liability: Proposals suggest that the state could continue to track former residents for up to ten years, potentially extending wealth‑tax obligations even after relocation.
Options for high‑net‑worth individuals
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Relocate within the U.S.
- States like Texas, Florida, Nevada, and Tennessee have no state income tax, though federal taxes (including Medicare and Social Security) still apply.
- Some states (e.g., Arizona) have recently increased taxes on high earners, so a careful comparison of total tax burden is essential.
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Move to U.S. territories
- Puerto Rico offers tax incentives for bona‑fide residents, including reduced federal income tax on Puerto Rican‑sourced income and specific tax credits for certain businesses.
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Establish offshore structures
- Depending on the nature of the business (e.g., capital‑gains‑focused vs. service‑based), it may be possible to channel income through jurisdictions with low or zero tax rates (e.g., certain Caribbean or European jurisdictions).
- Such arrangements must comply with U.S. anti‑avoidance rules (e.g., FATCA, GILTI) and require professional guidance.
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Optimize domestic tax planning
- Utilize available deductions, credits, and entity structures (LLCs, S‑corps, partnerships) to minimize exposure to the new payroll and gross receipts taxes.
- Consider timing of income recognition and expense acceleration to stay below surcharge thresholds where feasible.
Risks and caveats
- Federal tax exposure remains unchanged – Even if state taxes are reduced, the top federal marginal rate stays at 37 % for high earners, plus Medicare and Social Security obligations.
- Compliance complexity – New payroll and gross receipts taxes introduce additional filing requirements and potential penalties for misreporting.
- Uncertainty of passage – ACA 11 is still a proposal; legislative amendments or voter rejection could alter or eliminate specific components.
- Potential tracking of former residents – Some language in the proposal hints at continued tax obligations for up to a decade after leaving California, though the enforceability of such provisions is unclear.
Bottom line
If the ACA 11 amendment passes, California’s top marginal tax rate would climb to 18.05 %, accompanied by new payroll and gross receipts taxes that together could push the overall tax burden well above that of any other U.S. state. High‑income individuals and businesses should evaluate the total cost of staying versus relocating, weighing factors such as:
- Overall tax rate (state + federal) in the target jurisdiction.
- Quality‑of‑life considerations (climate, infrastructure, schools).
- Administrative burden of compliance in the new location.
- Long‑term stability of tax policy in the destination.
A thorough analysis—ideally with tax and legal professionals—can help determine whether moving, restructuring, or staying put best aligns with financial goals and lifestyle preferences.
