California is known for many things, including its breathtaking coastline, world-class entertainment, and iconic landmarks. Unfortunately, the Golden State has become known for something else over the years: Being in massive debt.
As of 2024, the state is facing a looming $68 billion dollar budget deficit. Now, lawmakers in Sacramento are looking to place a band aid on the state’s financial troubles by raising income tax rates for some of California’s top earners, as well as cracking down on tax evasion by implementing a controversial new strategy.
Sure, taxing the rich has always been a standard progressive policy. But could these sudden tax hikes actually backfire on Californians? Governor Gavin Newsom remains confident that these new tax plans will provide much-needed relief for working-class residents and provide the state with more of the resources it needs to thrive, but some experts warn that these tactics will drive high-income individuals away from the state.
Here’s what you need to know:
California Aims To Tax Top Earners In 2026
If you’re a California resident, the good news is that the likelihood of seeing an increase in your income tax this year is slim. The new policies aim to tax earners who have a combined net worth of $50 million as a married couple or $25 million if filing single. Known as the California Wealth Tax, this law will tax these earners up to 1% of their annual income, assuming the bill passes in Sacramento.
But the increases don’t stop there.
The state will also impose a higher tax on individuals with a worldwide net worth of over $1 billion beginning in 2026, forcing these residents to pay a 0.5% tax rate on their global net worth. Overall, the mission of this bill is to address excessive wealth and leverage these taxes to reduce the state’s deficit, which many perceive to be a punishment for top earners.
That said, the bill has yet to actually take effect in California. After being passed by the state legislature, the bill will placed on the ballot, where Californians will decide whether or not these proposed increases will move forward.
Who Can Expert To Pay More?
Beyond the hypothetical tax increase for top earners, other changes are on the horizon for California taxpayers. The first of which involves the state’s payroll tax, which is set to increase in 2024. Previously, the payroll tax only applied to wages up to $145,600. Now, the tax will continue to include wages above $145,600, meaning that workers earning a salary higher than this can expect an increase in their taxes.
With these changes in place, California is set to become the most expensive state for millionaires in the U.S. Currently, the state’s income top income tax bracket is around 13.3% but is expected to rise to 14.4% thanks to these new policies. That makes the Golden State more expensive than fellow high-tax states like New York, whose top tax bracket sits around 10.9%.
Thankfully, it isn’t all bad news for high earners in the state. California expects no changes in capital gains and investments, meaning that money put into these accounts will not be subject to new income tax rates. To offset the spike in state income taxes, the IRS plans to adjust federal tax brackets for inflation, creating some relief for those who face higher income taxes in the coming year.
The Fight Against Tax Evasion Continues
Naturally, higher tax rates lead to more attempts at tax reduction from those who don’t wish to pay these steep costs. California, in particular, has become a hot spot of tax evasion activity, with many top earners moving their assets to neighboring states like Nevada to enjoy lower tax rates. This strategy leverages what’s called an Incomplete Gift Non-Grantor Trust, or NING trust. Now, new legislation seeks to abolish this practice once and for all.
Along with increased tax rates, new tax laws will place all NING trust assets in with the taxpayer’s gross income, making it impossible for individuals to take advantage of lower rates in other states. Legislators are optimistic that this measure will force more earners to pay the full amount of their taxes, yet other experts argue that this could potentially drive residents away from the state.
With fewer tax reductions available, some financial advisors suspect that more millionaires will begin to abandon California altogether during the coming years. Right now, this is nothing more than a hypothetical theory, the reality of which will continue to play out as more Californians adjust to the changing tax laws.
Will Relief Be Possible?
Now, the real question is: Will these policies actually relieve California’s crushing debt?
That answer remains unclear. Originally proposed by Representative Alex Lee, the objective of the law is to provide financial relief for the state without placing a higher burden on working-class Californians, many of whom are already struggling through difficult economic times. However, detractors argue that this approach only places a bandaid on what is clearly a much larger issue in the state’s spending habits.
Currently, California is tackling a staggering $68 billion hole in the state’s budget, something that simply can not be remedied by an income tax increase. Either way, it will ultimately be up to residents to decide the fate of this bill when it arrives on the ballot later this year.
What This Means For The Future
Wealth tax policies like the ones proposed in California are becoming more and more common, with at least seven states planning to bring similar bills before the legislature over the next year. In other words, financial experts and taxpayers alike should be paying close attention to the impact of California’s new tax laws, as they could serve as a very big indicator of things to come.
