Forget the billionaire tax. This California measure could affect 376K taxpayers

• Key insight: While California's proposed billionaire tax has sparked discussion, another statewide proposal on the ballot would make permanent the increase in the top marginal tax rates, which range from 10.3% to 12.3%.
• Supporting data: Proposition 3 would affect nearly 376,000 taxpayers, compared with roughly 200 individuals who would be affected by Proposition 40, the proposed billionaire tax.
• Expert quote: "This should be getting a lot more attention than it is, and I think you will see that pick up in the near term." — Jason Stephens, Evertern Wealth

California's proposed one-time tax on billionaires has dominated much of the midterm tax debate, but another proposal on the ballot this fall would have implications for a far larger group of taxpayers.

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Proposition 3 would make permanent California's temporary increase in income tax rates for high earners, currently set to expire in 2031. Those top marginal income tax rates range from 10.3% to 12.3% and apply to income above specific thresholds: $361,000 or more for single filers or $721,000 or more for joint filers. Most of the revenue from the measure would be allocated to K-12 schools and the rest to community colleges.

For advisors with clients in California, the prospect of making these rates permanent raises questions about tax planning, including decisions about residency, Roth conversions, and when to time capital gains and other types of income. If the measure passes, advisors may need to work with clients on rethinking their plans.

Prop. 3 would affect nearly 376,000 individuals, based on 2024 data, while the billionaire tax, Proposition 40, would only affect about 200 Californians, according to the latter measure's proponents.

Polling indicates Prop. 3 is likely to pass. A September survey by the nonprofit, nonpartisan Public Policy Institute of California found 58% of likely voters would support Prop. 3, while 40% would oppose it.

Some wealth advisors are already considering the potential implications for clients.

"If you're a good advisor, you should tell your client they should live the life they want to and not live it around taxes," said Samuel Diarbakerly, the founder and CEO of Boston-based wealth management firm Generation Capital Advisors. "So, if you live in California and Prop. 3 passes, well, you're going to be subject to additional income tax."

In practice, however, some clients are more sensitive to tax increases than others. 

"Now some clients have the prerogative and are principal-bound and say, 'Hey, if I get taxed one more dollar, I am out of here,'" Diarbakerly said. "When you start adding these taxes together, if you're exposed to this, you're probably exposed to the highest, federal marginal rate. You're also probably exposed to the [net investment income] tax."

For clients considering a relocation, advisors should take a family office approach to changing the client's domicile and coordinate with legal and tax counsel, he added.

California residents affected by the tax may not leave the state right away, but the prospect of permanently higher rates could factor into relocation decisions over the coming years.

"This is exactly what a lot of people were talking about where you go after the billionaires, but you end up hitting the millionaires and the people below [that level] with other taxes, and it's a fallout," said Jason Stephens, founder and managing partner at Naples, Florida-based registered investment advisor Evertern Wealth. "So this should be getting a lot more attention than it is, and I think you will see that pick up in the near term, where you will see a lot more people talking about this because it affects, again, significant amount of people compared to the billionaires' tax, which only affects a few people."

How attitudes toward the tax have shifted

Marc Rosenbach, founder and managing partner of Los Angeles-based registered investment advisor Atlas Legacy Advisors, said attitudes toward California's higher income tax rates have evolved since voters first approved the temporary increase in 2012. By 2016, he said, the measure faced more skepticism, though not as much controversy as the current proposal to make the increase permanent.

Now, with permanence on the table, some high earners in the top tax brackets "feel misled," Rosenbach said. He is surprised that Prop. 3 isn't getting more attention, unlike the billionaire tax. 

"Prop. 40 is getting all of the oxygen in the room," he said.

Even if voters approve Prop. 3, Rosenbach doesn't expect a significant change in how he approaches financial planning for clients.

"Because we've been dealing with this since 2012, there's really no change to how we approach our clients," he added. "We approach them with best practices to manage a very high combined tax bracket," often 50% between federal and state.

Even so, he sees a shift in how wealthy Californians  weigh the decision to move out of the state for tax reasons. He said he has seen regret from individuals who have moved away. He now sees some placing greater value on living near family in California than on reducing their taxes.

"It is so easy to have the conversation with a client hypothetically about the present and the future — it's all about the numbers," Rosenbach said. But he tells clients and prospective clients to consider both quantitative and qualitative factors, including "the quality of your life and the roots you've laid down for several decades and understand what it means to be away from that for six months" to avoid being considered residents of California.

"Clearly now that there are enough people who have left, and they're realizing what they've left behind, what they're losing, and how their time on this planet is limited, they're realizing, 'Wait a second. Maybe I'm going to go back to Southern California despite the high tax bracket because I miss my friends and family,'" he said.

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