How 'Hotel California' Lyrics Could Be Prophetic About State Taxes

California has been known as the highest tax jurisdiction, with a graduated state tax rate ranging from 1 to 13.30 percent. When combined with federal tax rates amounting to 37 percent for top earners, the total tax burden can reach a mind-boggling 50.3 percent.

As though it was not enough to push wealthy Americans out of the state, the California State Assembly has made yet another attempt to introduce a wealth tax and even an “exit tax” for high-net-worth individuals who intend to leave the Golden State. Read on to learn about the status of the new law and some tips for those who are considering changing their Californian tax residency anytime soon.

Proposal on Wealth Tax

Earlier this year, the media exploded with the news about California's new tax bill, including a separate provision for an “exit tax” applied to those who leave the state. While Assembly Bill 259 introducing the wealth tax is not new and dates back to the beginning of 2023, it came under the public spotlight in January 2024 when the bill was supposed to be enacted. The public outcry was sparked after the publication of an editorial in The Wall Street Journal, echoed by a host of social media influencers.

The new legislation proposes imposing a wealth tax on individuals with a total net worth over $1 billion as of 2024, decreasing the minimum threshold to $50 million in the year 2026. The tax rate is set at the rate of 1.5 percent and will be applied to the worldwide net worth of every resident on the amount exceeding the minimum threshold.

Introduction of Exit Tax

In their intent to tax wealthy residents, California legislators have sought to expand the wealth tax to those who previously lived in the Golden State but are “no longer a resident and do not have a reasonable expectation to return.” Colloquially referred to as the “exit tax”, California's wealth tax applicable to former residents has become one of the most controversial parts of the new enactment.

While the analogous proposal for an exit tax two years prior set the tax at a flat rate of .4% per year, Assembly Bill 259 offers a complex formula tied to the number of years someone lived in the state. The formula for new “exit tax” results in higher average rate but still below 1% per year, with the numerator reduced by one each year until it reaches zero.

Current Status of the New Legislation

Bill 259 saw its daylight after two unsuccessful attempts by the California Assembly in 2020 and 2021 to introduce similar wealth taxes in the previous years. The previous California wealth tax proposals did not pass, while Bill 259 was publicly slammed by Governor Gavin Newsom, who reiterated his stance against the wealth tax in California.

Widely criticized, the new tax rule in California is blamed as unconstitutional, violating the right to travel, the federal commerce clause and due process laws. While the discussion of the new exit tax is still ongoing, California does not have a wealth tax or exit tax at this moment.

The critics note that the latest wealth tax and “exit tax” bill was not killed and can be brought to life at any moment, given the Golden State's gargantuan debt exceeding $500 billion. And while HNWI planning to leave California do not have to worry about exit tax just yet, they do have a lot of other considerations when trying to change their tax residency.

How California’s Taxman Targets Those Who Claim Different Tax Residency

Even without levying a wealth tax and an exit tax, California’s Franchise Tax Board (FTB) has a lot of leverage over anyone who earned income within the state and intends to claim another tax residency. For example, according to its clawback provisions, someone still has to pay tax in California on deferred compensation from stock options even if the income was realized after moving out.

Interestingly, the FTB even taxes athletes living out of state based on the number of games played in California and the so-called “duty days” according to its “jock tax” rule. In the same vein, the FTB has the possibility to tax someone for “gig income“ from California residents, income from California-based retirement, rental income from properties located in the state, sales, as well as in other similar circumstances.

Practical Steps to Leave California Tax Residency

Over the last few years, many wealthy Americans have been leaving California for more lenient states. This trend is not surprising given California’s never-ending attempts to come up with new taxes on top of having the highest income tax rate of any state in the United States.

That said, someone with a sizeable income received from sources in California needs to do a lot of planning when considering a new state of residency for tax purposes. While engaging a tax consultant is always recommended in such cases, there is a lot of legwork to be done to secure new tax residency in addition to the significant hustle involved in moving to a new place.

If you have already made up your mind to go “on a dark desert highway” and leave your tax residency in California, here are some practical recommendations:

◾ Always consult a tax advisor first before you change your tax residency.

◾ Consider moving your actual residency, property and business out of your old state and registering them in your new state.

◾ Spend more time in your new state of tax residency than in other states.

◾ Sever your connections with California, including membership in gyms, libraries, associations, and similar organizations and create new ties in your new state.

◾ Likewise, change your California driving license and bank account for another one in your new state.

Track the Number of Days You Stay In and Out of Each State

Last but not least, it is always important to track the number of days you stay in California and other states when you travel interstate. According to state laws, you can be considered as a dual resident if you spend a total of 183 days in California during any calendar year, which can have immediate tax consequences.

Since the 183-day threshold is not six months in a row but an aggregate total, it is important to track the move-in and move-out dates carefully to avoid surprises due to inaccurate travel track. For this purpose, many find it handy to use travel planner apps like Flamingo to track their location and days spent in each tax jurisdiction automatically, which helps exclude manual input and chances of accidental errors or omissions.