California Tax Measure Could Affect 376,000 Taxpayers

California’s Proposition 3 would make the state’s temporary income-tax increases for high earners permanent. The rates are scheduled to expire in 2031 and affect nearly 376,000 taxpayers, based on 2024 data.

The top marginal rates range from 10.3% to 12.3%. They apply to taxable income of at least $361,000 for single filers and $721,000 for married couples filing jointly.

Most of the revenue would go to K-12 schools, with the remainder allocated to community colleges. A September survey by the nonpartisan Public Policy Institute of California found that 58% of likely voters supported Proposition 3, while 40% opposed it.

The measure would affect far more people than Proposition 40, the proposed one-time tax on billionaires. Supporters of Proposition 40 estimate that it would apply to about 200 Californians.

Proposition 3 could affect tax planning for high earners, including decisions about residency, Roth conversions and the timing of capital gains and other income. Advisers may also need to review relocation plans with clients facing California’s highest rates, federal income-tax rates and the net investment income tax.

“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, founder and CEO of Boston-based Generation Capital Advisors. “So, if you live in California and Prop. 3 passes, well, you’re going to be subject to additional income tax.”

Some taxpayers may consider leaving California if the rates become permanent. Diarbakerly told clients that those who strongly oppose paying additional taxes may consider changing their domicile. Such a decision generally requires coordination among wealth advisers, attorneys and tax professionals.

Jason Stephens, founder and managing partner of Naples, Florida-based Evertern Wealth, expects the measure to receive more attention as voters compare its reach with Proposition 40.

“This should be getting a lot more attention than it is, and I think you will see that pick up in the near term,” Stephens said. He added that Proposition 3 could affect significantly more people than the billionaire tax.

California voters first approved the temporary increase in 2012. Marc Rosenbach, founder and managing partner of Los Angeles-based Atlas Legacy Advisors, described growing concern among some high earners who feel they were misled because the rates could become permanent.

“Prop. 40 is getting all of the oxygen in the room,” Rosenbach said, referring to the attention surrounding the billionaire tax.

Rosenbach does not expect Proposition 3 to change his firm’s basic planning methods because it has worked with California’s higher rates since 2012. Combined federal and state rates can approach 50% for some clients, he said.

Tax considerations may influence relocation decisions, though Rosenbach’s clients also weigh family ties and quality of life. He has worked with people who moved away and later reconsidered the decision after missing friends and family in California.