Economists Clash Over California Wealth Tax

California voters face a binary choice on Proposition 40: approve America's first billionaire wealth tax or reject it. The stakes are quantified in billions. One team of economists says the measure will generate roughly $100 billion. Another says it will drain $39 billion from the state treasury.

The proposal imposes a one-time 5% tax on the net worth of individuals who were California residents on January 1, 2026. It applies to assets including stocks, real estate, yachts, and art. The revenue is earmarked primarily for low-income health care to offset federal Medicaid cuts.

Gabriel Zucman, a professor at UC Berkeley and the Paris School of Economics, co-authored an analysis supporting the tax. He notes that California billionaire wealth hit $2.3 trillion by mid-2026. This total equals the annual income reported by all Californians. Zucman argues that existing income taxes fail the super-rich because they can structure finances to generate little taxable income.

Zucman and co-authors Jasper Boll and Emmanuel Saez calculated the $100 billion estimate. They started with 5% of the $2.3 trillion in assets. They then subtracted 10% to account for potential avoidance and evasion. Zucman believes the tax will start a national and international movement to tax the ultra-wealthy.

Joshua Rauh, a senior fellow at Stanford's Hoover Institution, co-authored a competing study with Benjamin Jaros. Their model predicts the tax will fail. Rauh argues that seven prominent billionaires have already left California. He lists Larry Page, Sergey Brin, Peter Thiel, Don Hankey, Steven Spielberg, Travis Kalanick, and David Sacks. Rauh says these departures remove about $30 billion in potential revenue before the tax even starts.

Zucman disputes the exodus argument. He states that legal experts believe these individuals have not successfully ended their California residency. He points to Sergey Brin, who moved to Nevada but commutes to Silicon Valley. Zucman argues that a change of address does not equal a change of tax residency. Rauh counters that Brin has likely established Nevada residency with the help of top accountants and lawyers.

Rauh also warns of legal challenges. He predicts billionaires will sue to block the tax. He cites the retroactive nature of the measure as a potential due process violation. The tax also targets wealth held globally, which could create jurisdictional issues. Rauh believes the Supreme Court's conservative majority might strike down parts of the law.

The political battle mirrors the economic one. Supporters poured $333 million into a group fighting to defeat the proposition. This sum reflects the fear among the super-rich that California's experiment will spark a broader movement. The proposal attempts to close loopholes found in past wealth taxes. It taxes business holdings and uses a fixed residency date to prevent last-minute moves.

Past wealth taxes have struggled. France scrapped its version in 2018 after loopholes allowed owners to shelter business assets. Norway has maintained a wealth tax since 1892. A recent study found that recent tax increases in Norway drove at most 100 rich people to leave. Those departures did not significantly reduce revenue. However, moving between states is easier than moving between countries.

The debate hinges on whether the legal and structural safeguards in Proposition 40 will hold. Zucman sees a historic shift in tax policy. Rauh sees a leaky bucket that will bankrupt the state. Voters decide on Election Day.