California’s proposed wealth tax, known as the 2026 Billionaire Tax Act, is generating significant debate following the release of the Legislative Analyst’s Office (LAO) preliminary report last week. The proposed one-time tax of 5 percent on billionaires’ net wealth has raised alarms among experts and observers regarding its long-term implications for the state’s economy and tax base.
According to the LAO, accurately predicting the revenue generated from this tax is challenging due to various factors, including potential taxpayer migration. The report cautions that if some billionaires choose to leave California, the state could face a loss of “hundreds of millions of dollars or more per year” in tax revenue from those departing individuals. This potential exodus could lead to a permanent erosion of California’s income and property tax collections.
The wealth tax proposal highlights critical issues surrounding revenue reliability and taxpayer behavior. The LAO suggests a projected collection of tens of billions of dollars, while proponents claim it could yield as much as $100 billion. This disparity underscores the difficulties in taxing wealth, as high-net-worth individuals often have the ability and incentive to minimize their tax liabilities.
Historically, nine of the twelve Organization for Economic Co-operation and Development (OECD) countries that implemented wealth taxes since 1990 ultimately repealed them due to consistently low revenue outcomes. Countries such as France and Germany experienced significant taxpayer avoidance and migration, leading to financial shortfalls.
California’s own experiences with tax increases provide a cautionary tale. Following the introduction of Proposition 30 in 2012, which raised top marginal income tax rates by 3 percentage points, research indicated that behavioral responses from high earners reduced projected revenues by 45 to 61 percent within two years. Many individuals restructured their finances, reduced their income, or relocated to other states with lower tax burdens.
The potential for migration poses a compounded risk to California’s fiscal health. The top 0.7 percent of taxpayers, earning over $1 million annually, contribute 35.7 percent of the state’s income taxes. Among them, the 5,232 individuals earning over $10 million account for nearly 13 percent of total income tax collections, translating to approximately $19 billion in annual revenue. The wealth tax directly targets this group, raising concerns that any significant departures would lead to a permanent loss of substantial income tax revenue.
Research on migration patterns following Proposition 30 indicates that high earners increasingly opt for states with no income tax, such as Texas, Nevada, and Florida. During the Tax Cuts and Jobs Act period, $4 billion in taxable income left California; this figure surged to $11 billion during the COVID-19 pandemic. A wealth tax could exacerbate this trend, further depleting California’s tax base.
Despite the LAO’s warnings, the potential financial implications may be understated. The phrase “hundreds of millions of dollars or more” in lost revenue suggests that the consequences could be far more severe than indicated. The proposal’s label as a “one-time” tax does not offer reassurance, as billionaires are likely to make decisions based on broader policy trends rather than singular political promises.
Additionally, the rationale for the wealth tax raises further questions. The initiative allocates 90 percent of tax collections to health care services, while California already spends $108 billion annually on health and human services, bolstered by $124 billion from federal funding. As federal Medicaid cuts approach, projected reductions of $7.8 billion in 2027-28 and $15.6 billion annually by 2029-30 will challenge California’s fiscal stability. Even if the tax generates the optimistic $100 billion claimed by proponents, it would only cover one year of current spending without addressing ongoing federal funding losses.
The LAO’s assessment serves as a critical reminder of California’s existing structural deficits and reliance on the volatile technology sector for income. The departure of economically productive residents would likely exacerbate these fiscal challenges.
In light of these concerns, Governor Gavin Newsom and other Democratic leaders, including San Jose Mayor Matt Mahan, who have expressed opposition to the proposal, should engage in public education efforts. The state’s financial future requires sustainable revenue sources and prudent spending strategies rather than relying on measures that could jeopardize long-term economic stability.
Joshua Rauh is the George P. Shultz Senior Fellow in economics at the Hoover Institution and a finance professor at the Stanford Graduate School of Business. Ben Jaros is a research fellow at the Hoover Institution.
