Enforcing California’s Proposed Wealth/Exit Tax

California has another proposal in its legislature for a wealth/exit tax. The bill includes provisions to create contractual claims tied to the assets of a wealthy taxpayer who doesn’t have the cash to pay their annual wealth tax bill because most of their assets aren’t easily turned into cash. This claim would require the taxpayer to make annual filings with California’s Franchise Tax Board and eventually pay the wealth taxes owed, even if they’ve moved to another state.

One of the common criticisms of the exit tax provision I’m seeing amounts to, “Oh, yeah, and how do you think you’ll collect when I’ve moved to another state?” My personal experience suggests the FTB knows how.

My wife and I moved to California in 1982. We left in 1990. When we left, we sold all our real property, removed all our personal property, and closed all our bank or other financial accounts in the state. We had no financial connection to California. In 1994, the Franchise Tax Board filed a tax lien on our house in Maryland, claiming that we owed back income taxes. That was first notice we had of the alleged delinquency. When we didn’t immediately pay in full, the FTB’s response was to turn us in the IRS, triggering a federal audit.

The IRS determined that we had overpaid for the year in question and sent us a refund of about a hundred bucks, and we were able to use that audit to show that we had overpaid our California income tax as well. It turned out California only owed us about five dollars. Normally, we would let such a small amount ride as a credit to be applied to next year’s taxes, but since we had no intention of ever living in California again, we made them send us a check—and remove the tax lien.

Yes, we beat California’s attempt of extort us, but I believe our experience shows the kind of tactics the FTB would use to enforce an exit tax.

UPDATE—It’s been pointed out that a wealth tax would violate the takings clause of the Fifth Amendment and an exit tax would violate the fundamental right to travel of the Fourteenth Amendment. True, but when has a law being patently unconstitutional ever stopped the California legislature from passing it?