California Wealth Tax and the risk of High-Net-Worth Migration

Introduction

In recent years, the California Legislature has examined proposals to introduce a state-level wealth tax aimed at the state’s highest-net-worth individuals. Although no comprehensive wealth tax has yet been enacted, the repeated introduction of such bills by the California Legislature has generated substantial legal, fiscal, and behavioral debate. The issue is significant because California already maintains one of the highest marginal income tax rates in the United States, and the prospect of an additional annual tax on accumulated wealth has coincided with notable outbound migration of affluent residents. However wealth taxes are seen by inidividuals as a countermeasure to wealth inequality, thus these measures remain high in public debate.

What is a wealth tax?

Wealth tax structure and form changes per country, its aim remain in the imposition of taxes on the accumulation of assets by an individual. The Tax Policy Center’s Briefing Book defines a wealth tax as an annual levy on the value of some or all of a taxpayer’s assets, including financial assets, real property, and business interests, typically measured as net wealth. The assets to be accumulate to achieve the minimum base for imposition include bank accounts, real estate, stock, privately held businesses, pensions, vehicles jewelry and art. However the base differs worldwide France and Spain have excluded certain businesses if taxpayers actively involve in the operation of the business.

Wealth Tax in California

The proposed California 5% wealth tax models generally target individuals with worldwide net assets exceeding very high thresholds, often discussed in the range of USD 1 billion. The measure is designed to create a reserve fund for Medi-Cal in response to anticipated federal funding cuts. Supporters frame the proposal as an answer to an increasingly wealth gap, in which high-skilled, asset-owning households accumulate wealth while large portions of the workforce face stagnating wages and rising costs of living. The tax base is defined broadly to include financial assets, business interests, real estate, and certain intangible property, valued annually at fair market value. Some drafts have also contemplated extended “exit tax” mechanisms, whereby former residents could remain subject to the wealth tax for a number of years after leaving California, based on their prior residency status. These proposals have not advanced into binding law, but their scope and structure have been sufficiently detailed to trigger serious planning responses among taxpayers and advisers.

The most critical legal elements in these proposals concern nexus, valuation, and constitutional constraints. The legislative reasoning relies on the premise that California may tax residents on worldwide assets due to personal jurisdiction grounded in residency, while proven that these individuals have factual mobility flexibility such as the case of Oracle recently moving to Texas. A further pillar is the argument that a wealth tax is distinct from an income tax and therefore not constrained by existing rate structures. Wealth taxes often ignore the possibility that there can be assets that may be iliquid and unrealized. These vulnerabilities have been repeatedly identified, particularly regarding interstate commerce, due process, and the practical enforceability of post-exit taxation. These weaknesses have featured prominently in legislative analyses and academic commentary, even in the absence of judicial rulings.

Analytical Commentary

From a tax policy perspective, the California wealth tax debate illustrates the tension between revenue-raising objectives and taxpayer mobility. Unlike income taxes, wealth taxes directly affect balance sheets rather than cash flows, increasing liquidity pressure and valuation disputes. For internationally mobile or multi-state taxpayers, the combination of worldwide asset taxation and aggressive residency rules materially heightens exposure. The anticipation of such a regime has already influenced behavior. High-net-worth individuals increasingly reassess domicile, timing of exits, and asset structuring, often before any tax is enacted. This anticipatory migration underscores that legal certainty, not merely enacted law, shapes taxpayer conduct.

A principal driver of outbound migration is the cumulative tax burden and regulatory uncertainty rather than any single tax measure. The prospect of a wealth tax has amplified concerns about retroactive reach, audit intensity, and long-term predictability. As a result, if passed, many taxpayers will relocate to jurisdictions such as Texas and Florida or even outside of the US, which offer clearer residency standards, and a more stable fiscal outlook. For advisers, the key lesson is that proposed legislation alone can trigger irreversible planning decisions, particularly when exit costs are expected to rise over time.

How Can MCORE Help

MCORE LAW assists clients in navigating high-stakes state and international tax exposure through proactive residency analysis, wealth structuring, and exit planning. We advise on constitutional risk, asset valuation strategies, and cross-border coordination to ensure that mobility decisions are legally defensible and tax-efficient.