It was about about nine years ago when consulting company BCG first suggested that in a time of out of control spending and soaring debt loads, the only fiscally sustainable "solution" was to implement a wealth tax (see "There May Be Only Painful Ways Out Of The Crisis").

While the idea was well ahead of its time in 2011 and was quickly shut down in the court of public opinion, several years later none other than the IMF resurrected the idea of a wealth tax, which has only gained momentum in recent months.

And despite widespread grassroots pushback, the concept of a "wealth tax" has moved front and center, and recently the chairman of Capital Economics, Roger Bootle, said that the world’s wealthiest could be subjected to higher tax rates as governments scramble to fund spending and repair their economies amid the coronavirus crisis.

Fast forward to today when the ultra-liberal state of California is now ready to take this "socialist" idea from concept to the implementation phase, with the SF Chronicle reporting that a group of CA state lawmakers on Thursday, August 13, proposed a first-in-the-nation state wealth tax that would hit about 30,400 California residents and raise an estimated $7.5 billion for the general fund.

The proposed tax rate would be 0.4% of net worth (most likely ending up far higher), excluding directly held real estate, that exceeds $30 million for single and joint filers and $15 million for married filing separately.

Oakland Democrat Rob Bonta, who is the lead author of the wealth tax proposal AB2008, justified the wealth expropriation by saying that California is facing a big budget deficit because of the health and economic crisis brought on by the coronavirus, and "we can’t simply rely on austerity measures," to close it.

It wasn't immediately clear why austerity doesn't work considering that California has never actually tried it, but in any case, the Democrat's proposal was clear: "We must consider revenue generation." And in doing that, California will trigger an exodus of billionaires who will be the first to realize which way the wind is blowing, and end up hurting the state far more than helping it as hundreds of ultra wealthy taxpayers leave for places like Florida or - for that matter - any other place in the world.

Bonta said that the union-sponsored bill will not be heard before the Legislature adjourns on August 31, but “it can be reintroduced on day one of the next session.”

What most normal Americans (i.e. those not living in California) may not know, is that this would be the second wealth tax set to pass in California. Bonta said he would like to see a wealth tax passed in addition to the “millionaires tax” proposed in a bill introduced in late July. AB1253 would add surcharges of 1% to incomes (joint or single) between roughly $1 million and $2 million, 3% on income between $2 million and $5 million, and 3.5% on income greater than $5 million, bringing the top rate to 16.8%.

California’s top rate today, at 13.3%, is already the highest in the nation, and it's only going higher.

The millionaires (and soon to be hundred thousand-aires, then ten-thousand-aires and so on) subject to the wealth tax would report it to the Franchise Tax Board along with their income taxes. They would have to report all assets, including stock in publicly and privately traded corporations; interests in partnerships, private equity or hedge funds; cash, bonds, and savings accounts; mutual funds, futures, and options; art and collectibles; and offshore financial assets, pension funds, non-mortgage debt, real property, and mortgage debt.

Which, of course, is idiotic because some of that wealth is extremely illiquid and evaluating it will not only take material time and effort, but also result in drastic costs. Furthermore, just how will the government confirm that whatever wealth is reported represents reality?

There was some good news, however: "Directly held real property, mortgages, and other liabilities secured by directly held real property” must be reported, but would not be considered in calculating the taxpayer’s worldwide net worth, the bill said. Yet, someone realized that this would simply be double taxing the same assets: "Real estate would be exempt from the wealth tax because it’s already subject to property tax, at a higher rate", Bonta said.

Among those handful of voices who call out this out for what it is was Jared Walczak, a vice president with the Tax Foundation, who said that “it is far easier to call for a state-level wealth tax than it is to actually design an enforceable one."

However, now that California is on the verge of passing a wealth tax, every other insolvent state will follow suit, staring with New York.

“Some New York legislators are floating the idea, but Governor Cuomo has poured cold water on the notion, rightly concerned that it would lead to an exodus of high net worth individuals from the state,” Walczak said via email. Somehow, California believes it is exempt from such an exodus. Yet, it isn't, and the state's wealthiest residents won't think twice to uproot and move their tax residence to another state.

There is, of course, the possibility that this idea will somehow die before it is enacted. Walczak said that implementing a wealth tax at the state level “would be extremely complex, with questions of how to value illiquid assets and whether residents’ out-of-state wealth — including their investment holdings — can be taxed.” He added that "any tax that is actually effective at taxing wealth, however, would be equally effective at driving wealth out of state."

Emmanuel Saez, a UC Berkeley economics professor, said income tax is not an effective way to tax the ultra-wealthy, because they can avoid the income tax as long as they don’t cash in their investments. Facebook CEO Mark Zuckerberg could avoid the income tax as long as he doesn’t sell his Facebook stock, and if he moved to Florida before realizing his gains, he may never owe tax to California, Saez said during a call announcing the bill.

Saez said the bill would not deter startups because it would let entrepreneurs defer the wealth tax for a period of time "Liquidity-constrained taxpayers with ownership interests in hard-to-value assets and business entities, such as startup businesses, shall be able to elect for an un-liquidated and deferred tax liability to be attached to these assets instead of the net value of these assets being assessed at the end of a tax year.” The taxpayer would have to sign a contract with the state specifying when the tax would be paid.

Instead of signing a "contract" with the state when the tax will be paid, all those entrepreneurs that keep the state afloat will simply leave. Guess what happens to the already dismal tax collections then.

None of this matters to him, and instead he pointed to a paper he co-authored, saying that California has 12% of the U.S. population, but 17% of all U.S. millionaires and 25% of its billionaires. In 2011, California had only 15.5% of the nation’s millionaires and 21% of billionaires. The wealth tax, he said, would hit about 0.15% of California tax filers.

The voices of reason, such as that of Robert Gutierres, president of the California Taxpayers Association, will become increasingly rare:

“'The state approved $9.2 billion in business tax increases in the new budget, but Sacramento politicians and special interests continue to seek income tax increases, property tax increases, a ‘headcount tax’ on in-state employees, and this new annual tax on money that was left over after all the other taxes were paid,'” Gutierrez said, adding that 'a very small number of Californians pay the vast majority of state income taxes. When the constant drumbeat for outrageous tax hikes drives them away, who will pick up the tab?'"

Why, the Fed of course.