Is California estate-tax proposal real or latest anti-Trump response?

SACRAMENTO – This year’s California legislative session has been thus far dominated by two persistent themes: The desire to stand up to the Trump administration and the pursuit of new tax dollars to fund infrastructure and other spending programs. Democrats have supermajorities in both houses of the Legislature, so Republicans have been able to do little more than complain.

A recent proposal by a new state senator from San Francisco captures both of these concepts in one measure. In late February, Sen. Scott Wiener, D-San Francisco, introduced Senate Bill 726, a direct response to a proposal by President Donald Trump. (Ironically, Wiener has been viewed as a “pro-business” Democrat, at least by Bay Area standards.)

The president wants to eliminate the federal estate tax, which imposes a 40 percent income tax on estates valued at $5.5 million or more. A couple of Republican-backed bills to repeal the tax are currently making their way through Congress. Wiener’s measure would institute a California estate tax that’s identical to the federal estate tax. Under Wiener’s bill, the state tax would only go into effect if Congress does away with the federal version.

Such estate taxes, often referred to as “death” taxes, don’t apply to a huge number of estates given the exemption, but they have earned the wrath of the president and many Republicans. Trump called the tax “just plain wrong.” President Barack Obama had proposed eliminating an estate-tax “loophole.” And Hillary Clinton had proposed raising the estate tax to an unprecedented 65 percent, according to a Forbes analysis.

Republicans dislike such taxes on grounds of “fairness” since many of these estates often are taxed twice and even three times. Such taxes can have a negative effect on small businesses, especially farms, which often struggle to stay afloat after the passing of the owner. Democrats see the tax as a way to find government revenue. They also make social-justice arguments for taxing larger shares of inherited wealth, which they view as exacerbating inequality.

“If Donald Trump and congressional Republicans are hell-bent on cutting taxes for our wealthiest residents, we should counter-balance those tax cuts by recapturing the lost funds and investing them here at home in our schools, our health care system, and our roads and public-transportation systems,” Sen. Wiener said in a statement.

Even if his bill passes both houses of the Legislature and is signed into law by Gov. Jerry Brown, it still faces a large hurdle: It would need to be approved by voters on a statewide ballot. That’s because voters in 1982 approved two slightly different statewide ballot initiatives (Propositions 5 and 6) that repealed the state’s then-existing inheritance and gift taxes and prohibited state or local governments from imposing them in the future.

If Congress repeals the estate tax and Californians impose a new estate tax at the ballot box, then the “death” taxes currently flowing to Washington, D.C., would head to Sacramento instead – to the tune of around $4.5 billion annually. Californians pay 26 percent of the nation’s total estate and inheritance taxes, according to Wiener’s statements. “Considering that California is generally a donor state to the federal government, that would mean significantly more money would remain in California for critical investments,” his office explained.

“A foolish, unnecessary tax,” said Jon Coupal, president of the Howard Jarvis Taxpayers Association. “At least they have to go to the voters to do this and I suspect citizens will be skeptical.”

Wiener’s approach, Republicans say, would leave California, which already has among the highest income-tax rates in the nation, at an even greater competitive disadvantage. California already has high tax rates that drive many businesses to other states. If the estate tax is gone nationwide, some believe it could spark an exodus of wealthy citizens to neighboring states given few state legislatures are likely to follow California’s approach.

Wiener defends his idea as a means to protect California’s progressive tax system, by which wealthier people are taxed at a much higher rate than middle-income and low-income people. “The #Resistance to Donald Trump takes many forms,” he wrote in a recent column. “Salvaging a highly progressive form of taxation, keeping the proceeds here in California, and using the funds to repair the damage caused by Trump and company certainly qualify.”

But it’s not only conservatives pointing to the perverse outcomes of our tax system. Gov. Jerry Brown has repeatedly noted the system’s design leads to budget volatility given such progressivity leaves California’s government dependent on a relatively small number of successful firms.

“In years when the state receives an unexpectedly large amount of tax revenue, state legislators tend to increase spending on programs and employee compensation significantly, believing the high revenues reflect a new normal,” wrote Autumn Carter, of US Common Sense. Then after revenues fall, legislators make “sudden” cuts to programs to balance the budget, she added.

Re-imposing a California estate tax would only make the state budget much more volatile. And it won’t reduce California’s income-inequality chasm. Research by the Tax Foundation finds states with steeply progressive tax rates do not typically have lower income inequality than states with more regressive tax systems.

As critics note, high net-worth people often move elsewhere when tax environments become too onerous. Furthermore, progressive tax rates may create an inordinately high demand for government spending. Voting majorities don’t pay a large share of the new spending, so there’s little personal financial downside for them by backing tax hikes and new programs.

A House Republican tax-reform task force last year called for eliminating the estate tax and a type of gift tax that penalizes people for giving money to their grandkids: “The elimination of the estate and generation-skipping transfer taxes will allow family-owned businesses to transition smoothly from generation to generation, without the burden of the estate tax that today can leave grieving families with no choice but to liquidate the family business to satisfy the estate tax obligation owed to the government upon the death of their loved one.”

Republicans say eliminating such taxes will also reduce an owner’s lifetime accounting costs. Some supporters of the estate tax downplay its punitive nature by noting most companies are able to minimize the tax bite through myriad accounting and tax-avoidance measures. They argue the administration ought to leave the estate and gift taxes as they are – rather than complicate an already complex system. But the tax still hits a lot of businesses, or else there wouldn’t be so much concern over tapping the revenue source.

California Democrats are sure they are channeling the public’s anti-Trump sentiments with many of their recent proposals. But are California voters willing to raise their own taxes – or at least the taxes of their deceased neighbors – to make a point to the new administration? We soon may see whether this is a serious measure or just the latest example of anti-Trump venting.

Steven Greenhut is Western region director for the R Street Institute. Write to him at [email protected]

11 comments

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  1. Richard Rider
    Richard Rider 21 March, 2017, 10:28

    Oh yeah, impose a HUGE CA estate/inheritance tax. That’ll go well!!

    Our “soak the rich” electorate will gleefully support this measure if it comes up for a vote. Kudos to the public education system for its highly successful progressive brainwashing.

    Meanwhile many other states have been dramatically CUTTING their estate taxes — recognizing that wealthy seniors find this final devastating levy a major factor in where they choose to live out their years. The wealthy flee NY state because of their onerous estate tax — and the CA tax would be a LOT higher than NY.

    It’s quite clear that, rhetoric notwithstanding, few people will leave the U.S. But they WILL leave a state.

    Believe me when I say that there are 49 other states that strongly support this latest California “Dukes of Hazzard” tax to support our aristocracy — Boss Hogg and the other public employees.

    Reply this comment
  2. michael
    michael 21 March, 2017, 10:31

    It has been rather amazing how willing California voters have been to approve bond measures and taxes, I suspect that many have no idea that they are imposing on themselves these increased costs. Further I doubt their understanding of just how little service we get in exchange.

    Of course I believe this is exactly how the government elite like their taxpayers. Dumb and compliant.

    Reply this comment
  3. Terry
    Terry 21 March, 2017, 10:32

    This state is determined to drive anyone that is a wealth generator out of this state. What will happen when only the communist in Sacramento and legal and illegal welfare food stamp crowd are the only ones left. Who are you going to tax then? CA govt employees? That will be fun to watch. Moonbean will be asking for more money from Trump. I hope Trump tells Moonbeam to use his CA taxes and learn to live with what you have in CA.

    Reply this comment
  4. Queeg
    Queeg 21 March, 2017, 11:10

    Comrades

    With huge cuts in funds for social programs coming from D.C. Expect Plutocrats to go crazy cleaning out your Europurses.

    At least Publicans won’t have Carl’s Jr. to kick around anymore…..

    Reply this comment
  5. Dude
    Dude 21 March, 2017, 11:55

    It has to go to the people for a vote. No way we’ll let the greedy liberals give our children’s inheritance to illegal aliens.

    Reply this comment
    • Terry
      Terry 21 March, 2017, 12:16

      Since the liberals outnumber the thinking conservatives you are dreaming. The communist liberals are giving everything away.

      Reply this comment
      • Richard Rider
        Richard Rider 21 March, 2017, 12:59

        Sadly, it will pass easily, because it DIRECTLY affects only a tiny portion of the population. It takes only a simple majority to become part of the California constitution. LATER it will affect everyone as the aging rich abandon the Golden State.

        But few will connect the dots — let alone connect the dots prior to the implementation of this huge “soak the rich” tax” — a new tax on top of by FAR the nation’s highest state income tax.

        Reply this comment
  6. Richard Rider
    Richard Rider 21 March, 2017, 13:12

    Here’s the good news. It will never pass as proposed.

    The federal estate tax starts a bit above $5 million in net worth. It BEGINS at 40% of assets above the $5 million threshold (actually $5.45 million in 2017) and rises quickly to 55%. The proposed California law would impose the SAME tax rates if the federal estate tax is repealed.

    But even the dumbest state legislator (a spirited contest for that appellation, to be sure) will eventually figure out that many — likely MOST — of the wealthy will then establish their state tax residence elsewhere prior to death. Since this state is so heavily dependent on taxing the wealthy via the CA income tax, this would kill off many of the geese laying the Golden Eggs.

    They MIGHT try to impose a much lower (but still confiscatory) estate tax, but not 40%-55%. That rate — or any rate CLOSE to that level — is going to REDUCE state tax revenue, not increase it.

    Reply this comment
  7. Drainthecaswamp
    Drainthecaswamp 21 March, 2017, 14:50

    Being neither Democrat or Republican, I can say this, I now call Democrats “DemonRats”. They are the true ship of fools. They are hell bent on destroying the once “Golden State” with their insatiable appetite for other peoples money. Regarding this issue, by what logic other than control and greed would you deem it OK to take 50-65% of someones life earnings when they die? Estate Taxs are the most unconstitutional tax of them all. Where is the incentive to prosper when you purchase all your assets with after tax income only to have government theives rob your estate when you die? What does this do to family businesses? The family home? Property? California DemonRat Legislators are greedy tax happy thieves! No wonder people are leaving the State in droves, whats next? Mandatory exit tax?

    Reply this comment
  8. Sammy the Bull
    Sammy the Bull 22 March, 2017, 21:35

    More political window dressing.
    The super-rich, by definition, pay nothing in estate taxes.
    It’s called “Having Armies of the Best Lawyers and Accountants Money Can Buy”.
    Middle class, however, gets SOAKED….

    Reply this comment

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Steven Greenhut

Steven Greenhut

Steven Greenhut is CalWatchdog’s contributing editor. Greenhut was deputy editor and columnist for The Orange County Register for 11 years. He is author of the new book, “Plunder! How Public Employee Unions are Raiding Treasuries, Controlling Our Lives and Bankrupting the Nation.”

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