Businesses in California are overwhelmed with employee lawsuits, excessive regulatory constraints, and taxation. The tax concern hits at every level-income tax, sales tax, property tax, fuel tax, personal property tax, and a host of others. The income tax burden hits not just the business but personally as well.
Due to unfunded public employee pensions and mounting debt due to Covid-19, the tax hit in California is growing far worse. The top tax rate in California is 13.3%. The State has proposed Assembly Bill 1253 which would raise the top rate to 16.8%. In addition to raising the tax rates, through Assembly Bill 2088, California proposes an additional wealth tax of 0.4% of net worth of $30 million for single and joint filers and $15 million for married filing separately. The wealth tax is estimated to hit about 30,400 California residents and raise approximately $7.5 billion. California will also be voting on Proposition 15 in November 2020 which, if passed, will raise property taxes on commercial properties. It is projected the tax will raise $6.5 – $11.5 billion if passed. The latest California budget raised taxes on businesses by $9.5 billion. California will not be the only state to head down this path of increased taxation. Local governments in California are also getting in on the tax bandwagon. San Francisco passed Proposition “C” which includes a type of wealth tax on businesses and an additional city tax on commercial rents. San Francisco and Oakland have both passed a per parcel tax on property. Other municipalities are imposing similar tax schemes.
The ten states with the highest personal income tax rates in 2020 are California (13.3%), Hawaii (11%), New Jersey (10.75%), Oregon (9.9%), Minnesota (9.85%), New York (8.82%) Vermont (8.75%) Iowa (8.53%), Wisconsin (7.65%), and Maine (7.15%). The rate for Washington D.C. is 8.95%.
Which states have the lowest personal income tax rates? Seven states have no personal income tax. Those states are Nevada, Alaska, Wyoming, Washington, Texas, South Dakota, and Florida. Tennessee, and New Hampshire limit their tax to interest and dividend income. They do not tax income from wages. Other states with notable low income tax include North Dakota (2.9%), Pennsylvania (3.07%), Indiana (3.23%), Michigan (4.25%), Arizona (4.54%), Colorado (4.63%), New Mexico (4.9%) and Utah (4.95%).
As mentioned above, income tax is just one of many taxes to be taken into consideration in evaluating the tax burden imposed by any one state. Texas for instance has no personal income tax but very high property taxes and “fees” for various things.
What happens when a business is overburdened with taxes, regulatory issues, and overly aggressive employee-friendly laws? Businesses leave. What happens when wealthy people are under the impression they are taxed at unfair levels. They leave. Take the wealth tax as an example. France implemented a wealth tax in 2000. Between 2000 and 2012 it contributed to the exodus of an estimated 42,000 millionaires. It was so destructive that in 2018, French president Emmanuel Macron eliminated it. In 1990, twelve countries in Europe had a wealth tax. Today, there are only three: Norway, Spain, and Switzerland. In those three countries, the “wealth” tax is not really a wealth tax at all. It acts as an add-on income tax to the upper middle class. A true wealth tax is perceived as a penalty for being wealthy, does not work, and causes an exodus.
You do not actually have to physically move out of a high tax state to eliminate some forms of income tax. There are some types of trusts which, if properly drafted and funded, can cause the taxation of intangible assets to be taxed at the rates of the jurisdiction of the trust as opposed to the state in which the grantor is a resident. For instance, if I live in California and set up a trust in a no-tax state such as Nevada, certain income of the trust can be subject to the tax laws of Nevada and not California. Not all trusts will provide this tax benefit so you have to make sure you have knowledgeable counsel to implement the structure.
If you decide to physically move to another state, you need to make sure you follow all of the steps to avoid your state of origin from claiming you never really left the state as a resident. The three steps to a successful change of residence are as follows: (1) you need to become a resident of the new state according to the new state’s rules, (2) Your state of origin has to recognize you are a resident of the new state according to the rules of the new state, and (3) your state of origin has to actually believe you are no longer a resident of the state of origin.
If you decide to move your business or branch out into a lower tax state, there are many items to resolve in the transition phase. Aside from the pure logistics of picking a state and ironing out the actual move, there are many legal issues that need to be considered including regulatory issues, contractual considerations, employee laws, laws specific to your industry, sales tax compliance, and many others.
Lobb & Plewe, LLP has services tailored for wealthy moving to no or lower tax states or businesses migrating to such states. The firm actually has a “Business Migration” practice group. From the initial legal analysis in determining transitioning to a new state, to the legal logistics related to the move and the laws of the new state, L&P has a comprehensive approach to assist wealthy individuals and businesses. In recent years our firm has assisted numerous wealthy individuals and business clients move to low or no-tax states. With the current tax environments in many states such as California, more and more wealthy individuals and businesses will be making transitions. Our firm has the trust and tax experience to incorporate a tax efficient trust into your structure. As well, we have the legal expertise to navigate the waters in transitioning the business to a new state and ultimately shed the burdens of the origin state.
