California appears to be on a path to create a one-time tax on billionaires. But that would be wrong. Spectacularly wrong.
The notion of the state raising $100 billion by a one-time, 5% tax on billionaires’ wealth may seem like a clear and simple way to offset an expected state revenue shortfall of roughly that amount. But it brings to mind the old H.L. Mencken quote: “For every complex problem there is a solution that is clear, simple and wrong.”
Why would this be so wrong? Let’s start with the fact that the tax, as envisioned, would be far more onerous than the supporters are letting on. They blithely wave off concerns and declare that billionaires can surely afford it. But this would be no ordinary tax. This would be a wealth tax, a 5% assessment on billionaires’ net worth, not on their income. Proponents like to confuse that difference.
Here’s a simplified example of a middle-class taxpayer: If you have income of $100,000 a year, a one-time 5% income tax would cost you $5,000. You’d grumble but probably write a check for it. But if you had assets of $1 million – a bank account, 401(k) accounts, a really nice stamp collection – a 5% wealth tax would cost you $50,000. Most middle-class people could not write that check.
Believe it or not, the same is true of billionaires. Except they would face a bill that runs to at least $50 million and quite possibly into the billions.
“The vast majority of billionaires are not able to write that check,” said Chris Mays, the Los Angeles-based national leader of the family office practice at Armanino and who works with billionaires and other very wealthy clients.
Like the middle-class person in the example above, billionaires may technically have the wealth to pay the bill, but they don’t have the liquidity. That means, for example, many billionaire real estate folks may have to sell properties. Or company founders would have to sell their stock, Mays said, which means “they reduce control of their company, which is untenable to them.”
The tax supporters may point out that the billionaires would have up to five years to pay the tax, which would be a help. But when they face such immense bills – Peter Thiel could have to pay $1.3 billion and Rick Caruso nearly $300 million, based on Forbes’ estimates of their wealth – they still likely would need to sell stock or properties or something.
Here’s something else they could do: They could leave California.
I know, I know. Whenever there’s a new tax or big regulation, wealthy people and businesses always threaten to leave but usually don’t. But remember, this tax – this wealth tax – is different.
Want evidence? We’re already seeing news accounts saying that billionaires including Google co-founders Larry Page and Sergey Brin appear to be buying palatial homes in the income-tax-free state of Florida. David Sacks, the San Francisco founder of venture capital company Craft Ventures and White House adviser on cryptocurrency, moved to the income-tax-free state of Texas in December. The aforementioned Thiel recently set up an office in Florida, pointedly saying that he already has a second home in that state.
By the way, my news outlet, the Billionaire Reporter, recently ranked the wealthiest 15 billionaires in Florida and discovered that 14 of those 15 moved to the Sunshine State in the last 10 years or so when they were already billionaires or well on their way to attaining the three-comma status. All 14 fled high-tax states including California. So that belief – the one which posits that high taxes don’t prompt billionaires to move – may need a rethink.
And what would happen to California if billionaires – not all of them, just some – left the state? Local philanthropic giving would surely decline, and civic leadership would suffer. Most worrisome: the dynamic Los Angeles and Silicon Valley economies powered by tech businesses and startup ecocultures would certainly dwindle. As the aforementioned Sacks recently tweeted, “Miami will replace NYC as the finance capital and Austin will replace SF as the tech capital.”
Here’s another thing: The billionaire tax will not raise nearly as much money as the proponents claim.
Let’s do some back-of-the-envelope math. (If you hate math, skip the next four paragraphs.) If 20% of billionaires leave – or, more precisely, if the billionaires who account for 20% of all billionaires’ wealth leave – it automatically means the $100 billion tax haul would be reduced to $80 billion.
But there’s double whammy. The state would also lose a future chunk of regular income taxes. A recent Pacific Research Institute study suggests billionaires will pay $30 billion in income taxes in the 2025-26 fiscal year. (They pay 23% of the state’s expected total of $130 billion, it estimates.) If you deduct 20% from the $30 billion each year over 5 years, because the billionaire tax has a five-year span, the state will lose $30 billion in taxes that would have been paid by the former California billionaires who will then be line dancing in an Austin honky tonk.
So, $80 billion in billionaire tax income minus the $30 billion in lost income leaves us with a net of $50 billion. I’m no math whiz, but isn’t that half of what the proponents claim the state will get?
If you do the same calculation assuming that 30% of the billionaire wealth leaves, the state will net only $25 billion after five years. And don’t forget that the reduced income tax level will stay with us and hex state finances for years.
(Angelenos know the hoax of inflated tax expectations. Proponents promised that the so-called mansion tax or Measure ULA that went into effect in 2023 that taxed high-value property transactions would raise $600 million to $1.1 billion a year. It only raised $215 million in its first year.)
Proponents will argue that the billionaires may leave the state, but they can’t escape the one-time wealth tax because the proposal says any billionaire who lived in California as of Jan. 1, 2026, will have to pay. (Which may explain why Sacks and the others moved before Jan. 1.) But that provision is questionable on its face and already getting pushback from legal types. And come on, now, you have to believe that billionaires with their vast resources will attack that provision endlessly.
Wealth taxes have been tried a few times but generally flopped. Germany’s wealth tax was declared unconstitutional in 1997, and the Netherlands repealed its wealth tax in 2021 after legal and economic challenges. Even Gov. Gavin Newsom recognizes the harm it would inflict on the state.
Like it or not, California needs billionaires. They provide jobs, create businesses and pay that outsized 23% percent of the state’s income tax.
It would be spectacularly wrong to chase them out of California.
Charles Crumpley is the editor-in-chief of the Billionaire Reporter. He is the former editor-in-chief of the Los Angeles Business Journal.
