As California, New York, and Washington state flirt with or pass higher taxes on millionaires and billionaires, a common objection resurfaces: If you tax the rich, they’ll just leave.
This debate has defined state tax policy for years. But as an exit tax proposal in Canada begins to circulate, maybe more states should consider whether they should first tax the rich’s ability to leave.
The argument against higher state taxes in the US is straightforward and facially plausible. High earners in the US can shift their income and residency across state lines with relative ease. By that logic, any effort to raise rates that ignores the exit margin is a bet on how many taxpayers are willing to stay put.
An exit tax would take that mobility seriously. Instead of treating the possibility of departure as a reason to avoid taxing high earners fairly, it builds that risk into the system upfront.
High-tax states already devote resources to policing residency by auditing high-income taxpayers who claim to have left and litigating where income was actually earned. This is a quasi-exit tax—just one that is opaque, inconsistently applied, and often resolved through litigation rather than clear rules.
A state-level exit tax could be a targeted mark-to-market system triggered on departure. When a high-income taxpayer establishes residency elsewhere, unrealized capital gains above a certain threshold would be deemed realized for state tax purposes, ensuring income amassed under one state’s jurisdiction is taxed before it crosses state lines.
Canada might have just provided states that are serious about taxing high earners with a workable—if imperfect—solution to the capital mobility issue. But policymakers must decide whether that mobility is a real constraint on tax reform or a rhetorical shield against attempting it.
—Andrew Leahey
Welcome to the Week in Insights for Bloomberg Tax’s latest analysis and news commentary. This week, experts analyzed state CPA licensing laws in the age of AI, a California proposal to increase taxes on data centers, and more.
The Exchange—It’s where great ideas on tax and accounting intersect.
Insights
California Data Center Bill Shows Skepticism of Development Costs
The California Senate’s recent bill for a tax increase on data centers’ use of natural gas to produce electricity reflects growing skepticism around the balance of benefits and costs associated with data center development.
AI-Focused Accounting Is Hindered by State CPA Licensing Laws
Reforming state CPA licensure requirements would give accounting firms more ways to recruit talent in the age of artificial intelligence.
Local Compliance Essential When Choosing UAE E-Invoicing System
Businesses choosing an e-invoicing service provider must consider which one gives them a defensible compliance architecture for the UAE. Operating model, contractual discipline, support capability, and data design may matter just as much as the technology itself.
Washington State Millionaire Tax Demands Tax Advisers’ Attention
Despite the legal challenges to Washington state’s new “millionaire tax,” tax professionals should review how it would affect their clients and prepare accordingly.
Georgia’s Tax Approach to Data Centers Offers States a Blueprint
Compared with other states, Georgia is developing data centers in a controlled, sustainable way by favoring retention and ratepayer protection over aggressive new growth.
AI-Powered Transfer Pricing Enforcement Should Rouse MNEs to Act
Multinationals should prepare for growing transfer pricing compliance challenges by building or buying technology that enables centralized data control, audit trails, and consistency checks across jurisdictions.
Five Questions With Crowe Tax Principal Rochelle Hodes
Bloomberg Tax Insights & Commentary is featuring a recurring questionnaire of prominent tax professionals who are willing to share their thoughts about their work and the practice of tax these days. Today we feature Rochelle Hodes, a principal in Washington National Tax at Crowe and former associate tax legislative counsel in the US Treasury’s Office of Tax Policy.
Technically Speaking
New IRS guidance on nominating opportunity zones does little to fix the program’s flaws, Andrew Leahey argues in his Technically Speaking column, adding that it leaves the door open for tax benefits to continue being allocated based on politics and geography.
Opportunity zone selection should depend on uniform federal criteria for economic distress, Andrew says, writing that “designated qualifying outcomes—such as net new housing units, commercial occupancy, or capital deployed into operating businesses—should replace governors selecting qualifying tracts.” Read More
News Roundup
IRS CEO Promises Audits of Wealthy as Democrats Slam Worker Cuts
IRS Chief Frank Bisignano told lawmakers Wednesday the agency is staying tough on some of the wealthiest taxpayers even as steep workforce cuts last year decimated many IRS units.
College Athletes’ Dual Earning Streams Make Filing Taxes Tricky
While college-athletes prepare year-round for grueling seasons on the field, they must do the same when it comes to tax filing season—especially as states have rejected legislation that would give them a break.
NY Democrats Push to Pair Second Home Tax Plan, Corporate Hikes
New York Democrats said they will continue to push for tax hikes on corporations in budget negotiations, despite
Microcaptive Disclosure Rule Tossed by Federal Judge
An IRS regulation that was meant to clamp down on microcaptive insurance transactions that the agency sees as abusive was partially struck down by a federal judge Wednesday.
Tax Management International Journal
Increased Advance Pricing Agreement Demand Puts Pressure on APMA
APAs remain increasingly valuable for managing transfer pricing risk despite APMA resource constraints.
Australia PepsiCo Case Raises Royalty Questions for South Africa
In light of the PepsiCo tax case in Australia, the South African Revenue Service may argue that certain payments made under a supply or distribution agreement are royalties subject to withholding tax.
Tax Management Memorandum
DOL Offers 401(k) Fiduciaries a Safer Path to Alternative Assets
A proposed rule from the Department of Labor would let 401(k) fiduciaries offer alternative assets if they document a prudent process on key risks.
Puerto Rico’s Act 60: When Are Pre-Move Bitcoin Gains Taxed?
An analysis of whether Bitcoin, and other cryptocurrencies owned prior to relocating to Puerto Rico constitutes “tainted property,” and the significant implications for Act 60 residents whose capital gains may remain subject to US tax.
Career Moves
Norton Rose Hires Tax Partner as Transfer Pricing Lead in London
Stephanie Pantelidaki joined Norton Rose Fulbright as a partner and Head of Transfer Pricing for EMEAPAC in London, the firm announced this month.
Greenspoon Marder Recruits Seven-Partner Team in Los Angeles
Ronald Resch, David Gitman, Robert Barnes, Andrew Jablon, Sandra Khalili, Stacey Knox, and Nicolas Ramniceanu joined Greenspoon Marder as partners in Los Angeles, the firm announced Monday.
Vinson & Elkins Hires Ed Moberly as Tax Partner in London Office
Ed Moberly joined Vinson & Elkins as a partner in its tax practice in London, the firm announced Monday.
Weil Adds Alec Campbell as Tax Partner in New York Office
Alec Campbell joined Weil, Gotshal & Manges as a partner in its tax department in New York, the firm announced Monday.
Venable Adds Paul B. Myers to Transactional Tax Group as Partner
Paul Myers joined Venable as a partner in its transactional tax group in Baltimore, the firm announced Monday.
Greenberg Traurig Expands Tax Practice With Munich Shareholder
Sebastian Leidel joined Greenberg Traurig as a shareholder in its tax practice in Munich, the firm announced Thursday.
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