A 5% wealth tax would drive billionaires out of California

CALIFORNIA’S ULTRA-RICH have been louder than usual lately. (Some have their own podcasts, so that is really saying something.) A statewide ballot initiative that would create a billionaire tax has rattled them. Peter Thiel, Larry Page and Sergey Brin—three of the Golden State’s roughly 200 billionaires—have begun to move business to low-tax havens such as Florida and Nevada. Mr Brin and others have lavished millions on a new political outfit that may oppose the measure or fund competing initiatives come November. “It’s just totally punitive and vicious,” says David Sacks, a venture capitalist and (former) San Franciscan.

The Billionaire Tax Act would create a one-time 5% wealth tax for California residents whose net worth exceeds $1.1bn. The measure was dreamt up by the SEIU, a health-care union, which argues that the takings would help replace federal funding cuts to the state’s Medicaid programme. It would allocate 90% of revenues to health care and the remaining 10% to education and food assistance. The initiative has yet to make the ballot (its supporters have until June 24th to collect the nearly 900,000 signatures needed). Yet in a matter of weeks the mere possibility of a billionaire tax has roiled business and politics in America’s biggest state.

There is a real question about how states that expanded Medicaid, America’s health-insurance scheme for the not-so-well-off, will cope with cuts included in President Donald Trump’s Big Beautiful Bill. But California’s Legislative Analyst’s Office suggests that attempting to solve the problem with a one-time wealth tax could imperil the state’s general fund in the long term. As recently as 2022 nearly 40% of personal income taxes in California were paid by the top 1%. If a wealth tax drives those golden geese away, that means less money for public services.

Then there are worries about the tax’s design. It would tax illiquid wealth and unrealised gains, such as shares in a startup. That appals techies. “If your paper gains are going to be considered wealth that you have to suddenly produce—and in a cash way give to the government—that’s going to kill this economy,” says Matt Mahan, the mayor of San Jose, Silicon Valley’s biggest city. Mr Mahan, a former startup founder, is now running for governor, buoyed by support from local tech titans. Arthur Mensch, a co-founder of Mistral, a French AI firm, made a similar argument when lefties in France (unsuccessfully) advocated a wealth tax last year.

The fight over the billionaire tax fuels an existing debate. The state, and the Bay Area in particular, has long assumed that firms will pay more taxes, larger salaries and higher energy costs because few other places in the world can offer the same concentration of talent. Call it the “California surcharge”. But at what point does the price become too dear?

Enrico Moretti, an economist at the University of California, Berkeley, found that billionaires (especially old ones) will move to avoid estate taxes when the state enacting them already imposes a high income-tax burden. “The state is not the right jurisdiction to tax high-net-worth individuals,” says Mr Moretti. You don’t have to leave America to avoid the levy, he adds. “All you have to do is go to Texas or Florida.” More moguls may move. “I’m hearing consistently from everyone I talk to that they are all instructing their lawyers and accountants to make plans for an exit strategy,” warns Mr Mahan.

The proposal comes as Democrats (largely in very blue places) are pondering whether wealth taxes might serve their “affordability” agenda. Some, such as Bernie Sanders, an 84-year-old senator for Vermont, think they can make life more affordable for the many by milking millionaires and making things like college tuition free. “Tax the 1%” can be good politics: Zohran Mamdani, New York’s new mayor, campaigned on raising income taxes on the rich. Washington and Rhode Island are mulling whether to tax millionaires.

“Abundance” Democrats, by contrast, favour supply-side policies such as making it easier to build homes and generate power, thus reducing prices. The issue will no doubt feature in future Democratic presidential debates. Gavin Newsom, California’s governor and the presumptive Democratic front-runner, does not support squeezing billionaires. He would rather they stay in California than move to a red state and pay for public services there. But he is careful not to seem too chummy with plutocrats. “I’ve met with all of them,” he said at a Bloomberg News event. “Some I respect, some I don’t.” ■