Ready to pick up and move to another state? Well, you might have to think twice because broke blue states are coming up with a new, creative way to tax you when you cross the border: the EXIT TAX.
You would imagine this could only happen if you were leaving the country, but this tax exists for some individuals and businesses when they move from the state of California.
California is already known for having the most significant state income taxes in the country, with a maximum rate of 13.3%. There is a reason people are fleeing California to move to states including Florida, Nevada and Texas, where there are no state income taxes.
California already has cities that include "mansion taxes" for sales of real estate properties. This is why you’ve seen so many wealthy people move to Nevada. Business owners often tell me that California is one of the of the most difficult states to do business in right now.
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With all these factors, many people who have built up their wealth are now thinking the Golden State isn’t so golden anymore.
So, how does California attempt to solve their massive deficit problem and create a new tax scheme that other broke blue states are likely to follow? They create an EXIT TAX for those who want to move from the state.
Here’s the American Dream….
You wake up one day and want to start a business in California. You take financial risk, family risk, legal risk, human resource risk, and put your 401(k) and your house on the line. Over a period of years, you become very successful through your hard work, sweat and tears that it takes to build that business while creating jobs and employing lots of Americans along the way.
Then when you decide there may be a better state to headquarter your business, a better state for you personally, and a more cost-effective place for your employees to live, the state can literally charge you an EXIT TAX, like a foreign country would, if you move from California.
How does this EXIT TAX work?
This is a one-time tax that must be paid by businesses and individuals who relocate outside the state. The tax is based on the value of the business or individual’s assets, including property, stocks and other investments, but not real estate.
The exit tax is 0.4% of an individual’s net worth over $30 million in a tax year, no matter where it’s located -- within California, other states within the U.S. or overseas. This amount is halved to $15 million if a married taxpayer files a separate return to their spouse. This EXIT TAX follows you to another state for up to 10 years.
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Naturally, high-tax, huge-deficit states have a lot to lose from wealthy people vacating their states.
It is difficult to assess the value of a business as market conditions change all the time, especially in the private market. California is making an unprecedented policy decision here to essentially tax unrealized capital gains and preventing the real spirit of free market enterprise in order to collect their 13.3% no matter what it does to the individual or the company.
If you own a $40 million business and have no other assets, will you be forced to fire people and sell part of the business just to pay the tax? It’s just another policy that seems short-term obvious with more negative, long-term and not-so-obvious consequences.
When tax policies like this get passed in one state, more follow with their own ideas on how to protect their state revenue, especially if they are working at a budget deficit. It may start with a high number (in this case $30 million), but don’t be surprised in the upcoming years if states make this a much more normalized number and include items like your stock options at work, employee stock and other assets they can argue you pay tax on where you "earned" the money and not where you live when it’s taxed.
The 2017 tax cuts expire in less than two years. Do you want your unrealized capital gains taxed in the future? The EXIT TAX is just the first step toward reaching deeper into the wallets of Americans.
