California’s Dreaming

– September 13, 2020 Reading Time: 6 minutes

In the Before Times, 24 February 2020 to be exact, I joked on these pages that at the rate California was going, it would soon have to build a physical wall to keep its taxpayers from fleeing en masse. Six months, a dramatic overreaction to a contagion, historic wildfires, chaos in the streets, and multiple blackouts later, and California is, indeed, trying to erect a wall, and claiming it is constitutional because it is a tax barrier to exit rather than a physical wall.

Politically, AB 2088 could pass because, for now, it only hits fortunes at 0.4 percent on every dollar above $30 million. Such a tax would be more novel than the novel coronavirus and doubtless has accounting and investment firms salivating at the thought of the crazy accounting conventions and derivatives they will be able to sell to wealthy Cali clients.

But the most novel aspect of the proposed tax is that it will try to follow former residents to other states, declining 10 percent per year until disappearing completely after a decade. From what I have gleaned from press reports, a Californian “worth” $130 million would have to pay Sacramento an additional $400,000 per year ($100 million times .004) if they remain in the Golden State. If they leave that former paradise, they will have to pay $360,000 (90% of $400,000) after the first year, $320,000 after the second year (80% of $400,000), and so forth.

The theory apparently is that the wealth was accumulated in California so the state has a right to tax it, though for all the state knows the assets were earned in a single year by playing basketball in Orlando, Florida, or speculating in European stocks, or playing craps in a Monte Carlo casino, or, in Prince Harry’s case, taking it from the British people.

I am not sure exactly when it started, but I now spontaneously drop the f-bomb between “Cali” and “fornia” when speaking of the state and this development makes me think of asking my U.S. Senators to propose a bill formally changing the state’s name.

But seriously, the proposed bill is blatantly unconstitutional.

For starters, Constitutional attorneys note that the bill would create an ex post facto law, which is explicitly banned by Article I, Section 9, Clause 3 of the U.S. Constitution. Since passage of the 14th Amendment in 1868, the U.S. Constitution applies to state as well as federal laws. Ex post facto laws should be anathema to all in any case because they change the rules in the midst of the game, a form of dirty pool.

It also runs afoul of Article I, Section 9, Clause 5, which stipulates that “No Tax or Duty shall be laid on Articles exported from any State.” People themselves are not exported “articles” but their assets, the direct object of the proposed levy, certainly are.

According to the California constitution, Article XX, Section 3, “Members of the Legislature, and all public officers and employees, executive, legislative, and judicial … shall, before they enter upon the duties of their respective offices, take and subscribe the following oath or affirmation: I, ___________, do solemnly swear (or affirm) that I will support and defend the Constitution of the United States and the Constitution of the State of California against all enemies, foreign and domestic; that I will bear true faith and allegiance to the Constitution of the United States and the Constitution of the State of California; that I take this obligation freely, without any mental reservation or purpose of evasion; and that I will well and faithfully discharge the duties upon which I am about to enter.”

How can one swear or affirm allegiance to a document that one does not understand? Or well and faithfully discharge duties if one does not understand the purpose of the oath one is taking? Should not support of AB 2088 be prima facie evidence that the individual is not fit to take the oath, or is not well and faithfully discharging his or her duties, and hence is ineligible for office?

A more subtle point, but one elected and appointed officials should understand, is that under the U.S. Constitution Americans are simultaneously citizens of the United States of America and their respective states of residence, but they may move freely about other states and/or change their state of residence at will. This was made clear by early Supreme Court cases, like Corfield v. Coryell, that cited unenumerated economic rights as well as the Privileges and Immunities Clause (Article IV, Section 2). In Federalist No. 80, the indomitable Alexander Hamilton, think of him what you will, called that clause “the basis of the union.” (By threatening the very basis of the Union, California legislators are also breaking the letter of the second half of their constitutionally-mandated oath of office: “And I do further swear (or affirm) that I do not advocate, nor am I a member of any party or organization, political or otherwise, that now advocates the overthrow of the Government of the United States or of the State of California by force or violence or other unlawful means.”)

But of course the law is complex and wrinkles may be exploited. Some states tax the incomes of their residents. Matters get tricky when a former resident of one state earns income in another, which is a common occurrence. The more autocratic states, like California and New York, make their ex-denizens prove that they have permanently relocated with documentation like home sale, state of issuance of drivers’ and other licences, location of voter and automobile registration, and so forth. Many people temporarily relocating for work find themselves facing dual taxation, though some states credit taxes paid to another state for work physically done there. In short, there exist precedents that California is sure to try to exploit.

Moreover, the U.S. Supreme Court does not have a good track record on economic issues since 1937 and really cannot be trusted in its current configuration.

Every American should be prepared to vigorously protest this tax if it becomes law and passes Constitutional muster because it will soon affect them all:

If California succeeds, New York won’t be far behind and soon every state controlled by Democrats will have a similar tax.
The tax rate will creep upward over time and the trigger wealth value will decline over time, either due to changes in tax law or inflation or an asset bubble. Look for 1 percent on fortunes, including retirement accounts and homes, over $1 million within a decade.
Such taxes will crush the economy. Sure, taxes have gone up before without sending us into a spiral of poverty but all that proves is that we haven’t reached the critical margin yet. If you don’t understand that, try this experiment: start popping oxycodone pills. You are still alive, right? Well keep taking them. They haven’t killed you yet, so by your logic just one more won’t cause addiction or overdose, right? Seriously, don’t do that. You will die sooner or later, just like our economy will sputter to a halt if taxes increase too much. Theory and history (Imperial Spain, Ancien Regime France, the USSR, North Korea, and Cuba spring immediately to mind) both show that.
But the worst thing about Cali’s wealth tax will be its effect on politicians’ calculations. About the only effective check on government overreach left to Americans is the right to move to a lower-tax, higher-sanity jurisdiction. California wants to tax that right to “vote with our feet” and usurp yet more of our liberty in the process.

I am reminded of a letter penned circa 1767 that I discovered over a decade ago that the New Jersey Historical Society had miscatalogued over a century ago. It won’t give me permission to reproduce it in its entirety, but the key sentence reads, “I must observe that it is not the Stamp Act or New Duty Act alone that had put the Colonies so much out of humour, tho the principal Clamour has been on that Head, but their distressed Situation had prepared them so generally to lay hold of these Occasions.”

You may recall from history class that arrogant British policymakers were astounded that the colonists reacted so violently and completely against such a “small” tax with what the policymakers believed was ample precedent. That is because they did not understand that the colonists were already bearing barely tolerable regulatory burdens related to foreign trade and monetary policy. The Stamp Act was one oxycodone too many, the brick that broke the donkey’s back. Similarly, AB 2088 could break the back of the Donkey party or unleash another dangerous wave of mostly peaceful protests throughout the land. This time, though, the fatal arrogance comes not from London but Cali you-know-what fornia.

Robert E. Wright is the (co)author or (co)editor of over two dozen major books, book series, and edited collections, including AIER’s The Best of Thomas Paine (2021) and Financial Exclusion (2019). He has also (co)authored numerous articles for important journals, including the American Economic Review, Business History Review, Independent Review, Journal of Private Enterprise, Review of Finance, and Southern Economic Review. Robert has taught business, economics, and policy courses at Augustana University, NYU’s Stern School of Business, Temple University, the University of Virginia, and elsewhere since taking his Ph.D. in History from SUNY Buffalo in 1997. Robert E. Wright was formerly a Senior Research Faculty at the American Institute for Economic Research.