California lawmakers are preparing a new tax package—Assembly Bill 71—that would raise taxes on high‑income earners, increase capital‑gains rates, and revisit a state‑level wealth tax that was previously rejected in 2020. The proposal is framed as a response to the state’s homelessness crisis, but it also reflects a broader push among Democratic policymakers to target wealth more aggressively.
What Assembly Bill 71 proposes
- Higher state income tax for million‑dollar earners – The bill would apply a “millionaire’s tax” to anyone earning $1 million or more in annual income. California already has the nation’s highest marginal state income tax at 13.3 %; the new rate would climb into the mid‑teens (approximately 16 % of income).
- Increased capital‑gains taxation – The legislation calls for a higher rate on capital gains and expands the portion of gains that are taxable.
- Elimination of the stepped‑up basis – Currently, heirs receive a stepped‑up basis that resets the cost basis of inherited assets to their market value at the time of death. The bill would remove this provision, meaning capital gains on inherited assets could be taxed.
- Higher corporate tax rates – A progressive corporate tax structure would be introduced, raising the tax burden on businesses operating in the state.
- Potential wealth‑tax component – While the bill does not explicitly label a new wealth tax, legislators are reportedly exploring ways to tax wealth without using that terminology, possibly reviving elements of the 2020 proposal that sought an annual tax on net assets of high‑net‑worth individuals.
- Retroactive application – The earlier 2020 effort included a retroactive element that would have taxed individuals who had already left California on assets held during the prior ten years. The new bill may retain a similar retroactive feature.
Context and motivation
California’s 2020 attempt to impose a state wealth tax failed to pass, but the idea resurfaced as part of a broader political narrative that links high‑income taxation to funding social programs, especially homelessness relief. Recent polls in other jurisdictions (e.g., Canada) show strong public support for taxing the ultra‑wealthy, and policymakers in the United States have already used retroactive tax measures in 2017, suggesting a precedent for such approaches.
Potential impact on high‑income residents
- Increased tax liability – A high‑earner who currently pays the 13.3 % state rate could see an additional 2–3 % in state taxes, plus higher capital‑gains and corporate taxes if they own a business.
- Reduced after‑tax income – For a $1 million salary, the extra state tax could amount to roughly $30,000–$40,000 annually, not counting possible federal tax changes.
- Estate planning complications – The removal of the stepped‑up basis would make inherited assets more taxable, potentially altering wealth‑transfer strategies.
- Compliance risk – California’s Franchise Tax Board (FTB) is described as an aggressive tax‑collection agency, increasing the likelihood of audits and enforcement actions for those who fall under the new rules.
Options for affected individuals
- Relocate within the United States – Moving to neighboring states such as Nevada, Arizona, or Florida can eliminate the high California state tax burden while still maintaining U.S. residency.
- Consider U.S. territories – Puerto Rico offers a tax regime where qualifying residents can benefit from the “Act 60” incentives, reducing combined federal and local tax rates to as low as 4‑10 %.
- Explore foreign residency – Establishing residence in jurisdictions with favorable tax treatment (e.g., the Bahamas, Singapore, Ireland) can enable the use of the foreign‑earned‑income exclusion and lower overall tax exposure.
- Re‑structure business operations – Shifting corporate functions abroad or forming offshore entities may lower corporate tax rates, though such moves must comply with U.S. anti‑avoidance rules.
Practical considerations
- Timing – The bill is still in committee; its final language and effective date remain uncertain. Early planning can mitigate exposure to any retroactive provisions.
- Documentation – Maintaining clear records of residency, income sources, and asset holdings will be essential if the state pursues retroactive taxes.
- Professional advice – Complex tax reforms often require coordination among tax attorneys, accountants, and immigration specialists to navigate both state and federal implications.
While Assembly Bill 71 is positioned as a tool to address homelessness, its broader effect could be a significant increase in the tax burden for high‑income Californians and a catalyst for wealth‑tax discussions nationwide. Individuals and businesses with substantial earnings or assets should monitor the legislation closely and evaluate relocation or restructuring strategies to preserve after‑tax wealth.
