Brilliant piece on the coordination problem embedded in this proposal. The timing mechanism is what makes this especially problematic, not just the rate itself. Watched a similar dynamic play out in my own statewhen they tried hiking income brackets, the folks with options restructured fast. California's revenue concentration at the top is wild when you actually map it out; losing even 2-3% of that cohort would wipe out whatever short-term bump they project from the levy.
Claiming the 5% tax is a 5% tax is not necessarily correct. This provision gets very little coverage and it's why Larry Page and Sergey Brin want nothing to do with it:
Section 50303(c)(3)(C)
"For any interests that confer voting or other direct control rights, the percentage of the business entity owned by the taxpayer shall be presumed to be not less than the taxpayer's percentage of the overall voting or other direct control rights."
Page & Brin own about 6% of Google but have voting rights of about 51%, meaning their tax liability would be 5% of 51% of Google's market value not 5% of 6% of their equity value.
If we say that Google stock represents their entire net worth and they have a zero basis, then selling the stock to pay the 5% tax means they'd first have to pay the 20% Federal capital gains tax, the 3.8% Obamacare surcharge, and the 13.3% California tax, for a total tax of about 37%. So, the effective total tax is 5% * 51% / (1 - 0.37) = 4% of Google's market value. They own 6%. They give up two-thirds of their Google-related net worth (4% / 6%), not 5%.
In addition, the sale of this much Google stock to pay the tax is likely to substantially reduce the market price and their after-tax realization. It will not, however, reduce the valuation for assessing the billionaire tax. Their net tax could be substantially larger than two-thirds in this case.
If they borrow against the stock to pay the tax, they pay billons of dollars per year in interest expense and expose themselves to default and bankruptcy if the stock declines enough for a margin call.
In the case of illiquid stock, non-public stock, stock with no obvious valuation mechanism, stock with little or no collateral value or very high borrowing costs, stock with even more skewed voting rights, etc. everything is even worse.
California could hardly have come up with a better way to have billionaires exposed to this type of risk take their companies, their employment, and their other, conventional taxes to some other states.
Just proposing it creates uncertainty and is harmful to California's long-term prospects.
My personal opinion... if your wealth is measured in the billions and you elect to live on the West Coast, Illinois or New York, I'm not shedding any tears for you if the state government comes for your billions. The political preferences of those states are a matter of public record.
Brilliant piece on the coordination problem embedded in this proposal. The timing mechanism is what makes this especially problematic, not just the rate itself. Watched a similar dynamic play out in my own statewhen they tried hiking income brackets, the folks with options restructured fast. California's revenue concentration at the top is wild when you actually map it out; losing even 2-3% of that cohort would wipe out whatever short-term bump they project from the levy.
Claiming the 5% tax is a 5% tax is not necessarily correct. This provision gets very little coverage and it's why Larry Page and Sergey Brin want nothing to do with it:
Section 50303(c)(3)(C)
"For any interests that confer voting or other direct control rights, the percentage of the business entity owned by the taxpayer shall be presumed to be not less than the taxpayer's percentage of the overall voting or other direct control rights."
Page & Brin own about 6% of Google but have voting rights of about 51%, meaning their tax liability would be 5% of 51% of Google's market value not 5% of 6% of their equity value.
If we say that Google stock represents their entire net worth and they have a zero basis, then selling the stock to pay the 5% tax means they'd first have to pay the 20% Federal capital gains tax, the 3.8% Obamacare surcharge, and the 13.3% California tax, for a total tax of about 37%. So, the effective total tax is 5% * 51% / (1 - 0.37) = 4% of Google's market value. They own 6%. They give up two-thirds of their Google-related net worth (4% / 6%), not 5%.
In addition, the sale of this much Google stock to pay the tax is likely to substantially reduce the market price and their after-tax realization. It will not, however, reduce the valuation for assessing the billionaire tax. Their net tax could be substantially larger than two-thirds in this case.
If they borrow against the stock to pay the tax, they pay billons of dollars per year in interest expense and expose themselves to default and bankruptcy if the stock declines enough for a margin call.
In the case of illiquid stock, non-public stock, stock with no obvious valuation mechanism, stock with little or no collateral value or very high borrowing costs, stock with even more skewed voting rights, etc. everything is even worse.
California could hardly have come up with a better way to have billionaires exposed to this type of risk take their companies, their employment, and their other, conventional taxes to some other states.
Just proposing it creates uncertainty and is harmful to California's long-term prospects.
My personal opinion... if your wealth is measured in the billions and you elect to live on the West Coast, Illinois or New York, I'm not shedding any tears for you if the state government comes for your billions. The political preferences of those states are a matter of public record.