Yes, California's Proposed Wealth Tax Could Tax Voting Interests
A response to proponents who have dismissed the concern
One of the many shortcomings of the proposed California wealth tax is a provision that has the potential to strip the founders of some of the world’s largest companies of their controlling interests by valuing their holdings based on voting interests that exceed their economic stakes.
Last week, I explained how this provision and several others combine to massively overvalue net worth for wealth tax purposes. Valuation based on super-voting shares has been flagged as a major issue by many in California’s tech community as well. Founders and early investors often hold super-voting shares that could lead to valuations that far outstrip their actual stake in their company, potentially forcing them to sell off a significant portion of their shares and send stock prices plummeting.
That argument received pushback from four professors associated with the wealth tax initiative, who claim that the founders of publicly traded businesses would not have their holdings valued by voting or direct control rights. This provision, they note, does not apply to publicly traded assets—and therefore, they claim, it won’t apply to super-voting shares in publicly traded companies.
Their argument collapses two categories. The initiative says the voting-share valuation rule does not apply to publicly traded assets, not to shares in publicly traded entities. The memo assumes that these are identical, i.e., that all shares in a publicly traded company are publicly traded assets, even if the share class does not trade. This is not the case.
Alphabet (Google), Meta, and Airbnb, for instance, are publicly traded companies. But their founders’ Class B super-voting shares cannot be listed on an exchange. They lack a secondary market, and their value is tethered to specific founders. Those shares are not publicly traded, even though they’re shares in publicly traded companies.
The professors also argue that any improper valuation could be resolved through a dispute mechanism under which default valuations can be contested. The option of challenging a default valuation is never a sufficient solution to overly aggressive valuation rules, but is particularly inadequate here, as the initiative imposes a chilling effect on certified appraisals through severe penalties on both taxpayers and appraisers who submit valuations that California’s Franchise Tax Board (FTB) ultimately rejects.
If the FTB determines that a taxpayers’ super-voting shares should have been valued based on controlling interests, or at least valued at some premium over other company stock, the taxpayer would face a penalty of up to 40% and their appraiser could get hit with a penalty of up to 4% of the underpayment—which is potentially ruinous for appraisers, since they are tax professionals, not billionaires.
I have written a memo explaining in greater detail why, despite wealth tax supporters’ downplaying of the issue, aggressive valuation rules create the very real possibility of taxing controlling interests. The memo has been posted to SSRN and can be downloaded here.
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