Last month a group of progressive academics introduced a plan to put a new wealth tax on the ballot. The initiative is aimed at billionaires who reside in California as of January 1, 2026. The tax isn't a standard income tax, it's a "one time" wealth tax which would take 5% of whatever the state's billionaires own as of the end of next year.
Supporters say that if this passes it would raise $100 billion from about 180 people. That money would then be used at a rate of $25 billion per year for the next four years to cover the state's budget shortfall. Why is California is such dire straights? Partly because the state extended Medicaid to illegal immigrants. This cost of this program turned out to be about twice as much as anticipated and the state had to borrow billions to cover the cost. The program itself was also put on hold.
Today the Washington Post published an editorial calling the plan the "greatest act of economic self sabotage in recent history. The editorial praises Gov. Newsom for pushing back on this tax plan.
California Gov. Gavin Newsom has been trying to position himself as the leader of a listless Democratic Party ahead of his likely presidential run. He’s had some success energizing the base, but will the ambitious governor survive standing up to what could be his state’s greatest act of economic self-sabotage in recent history?...
Set aside the legal challenges that would inevitably follow and could prevent the tax from ever being levied. The most likely result is that billionaires would flee, so the state would also lose non-wealth-tax revenue. The risk of the measure passing might even cause some billionaires to leave, just in case. This initiative seems almost tailor-made to drive most Silicon Valley tech companies to Austin, Texas.
No doubt, Newsom understands the state probably wouldn’t recover from such an event, which is why he opposes the measure. His allies have already launched a political action committee to fight it...
More interesting than his electoral calculation, however, is what policy and moral arguments he uses against the tax. His approach, and how voters respond, will speak volumes about the state of Democratic Party as it seeks its way out of the political wilderness.
How will Newsom push back on this plan exactly? Will he not that a wealth tax that only applies to a fraction of the population is a matter of basic fairness? Forbes actually used this in it's case on behalf of the tax.
California has nearly 40 million residents. The proposal suggests that a tax on just 200 of these people could address two significant concerns. Put differently, a tax on just 0.00005% of the population would address a significant set of problems facing all of California.
Regarding the second point, California billionaires tend to own superfluous assets. For instance, Zuckerberg owns 11 homes in Palo Alto, California, according to the New York Times. Many would argue that if he had to sell one or two of his homes, his life would not be materially impacted.
I don't think anyone believes that taxing billionaires would materially impact their lives. That's missing the point. The wealth of billionaires is almost always tied up in their ownership of valuable companies like Tesla or Amazon or Netflix. When you create a wealth tax you're not asking them to give up a 10th home (which would be worth a few million, at most), you're forcing the owner to cede a portion of his ownership of the company he created. You are effectively seizing the means of production piecemeal and saying that once any enterprise becomes really successful, the government has the right to claim it.
Will Newsom admit that once created it's very unlikely this wealth tax will only be used once? Whatever he says against this tax will be running up against the popularity of this idea on the far left and attempts to install similar taxes in other states. And as the Post notes, creating this tax is all but begging these very successful people to go someplace where success isn't punished.
The most common issue raised by skeptics of wealth taxes is “capital flight”. As discussed in a Tax Notes article, “such a tax would signal to wealthy taxpayers that they should reside elsewhere.” This article goes on to discuss that high-income taxpayers pay the majority of state income taxes in California, and even if a small number of those individuals leave, it could lead to long-term tax collection consequences.
This concern has been underscored by numerous academic studies. Most recently, an NBER working paper co-authored by Jakobsen, Kleven, Kolsrud, Landais, and Munoz finds that 1 one percentage-point increase in the top wealth tax rate in Sweden and Denmark leads to an outward migration of wealthy taxpayers by two percent. Other work in the American Economic Review by Moretti and Wilson documents that variation in jurisdictional taxes significantly influences the location of talent, suggesting that higher tax burdens lead individuals to relocate.
Anecdotally, we can look no further than Jeff Bezos (founder of Amazon), who moved from Washington to Florida in 2023. Even though he has many non-tax reasons to make this move, the move just so happened to coincide with Washington proposing a 1% wealth tax on individuals with over $250 million in total assets. Different from California, Washington is already a very competitive state as it comes to overall tax liabilities. As high-income Californians face the highest level of state income tax liability, this proposed wealth tax could be the straw that breaks the camel’s back toward their relocation decision.
Speaking of Elon Musk, the article continues:
If even a small number of the current California billionaires follow his lead in response to the proposed wealth taxes, not only would California not be able to collect $100 billion in incremental revenue, but it could also end up in a situation where the state is worse off financially.
Newsom isn't opposed to this because he loves billionaires. He's opposed because he's smart enough to realize this would be a disaster for his state. If even a dozen billionaires leave, that will blow an even bigger hole in the state's budget and mark California as a place where you should not choose to launch a potentially successful company in the future. This tax is how the golden state kills the golden goose.
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