Last week, the state’s Legislative Analyst’s Office released its initial description of the “2026 Billionaire Tax Act,” a one-time, 5 percent tax on these individuals’ net wealth. Its conclusions should concern every California voter. The LAO confirms what we’ve been documenting at Stanford’s Hoover Institution: a proposal that exchanges an uncertain, short-term revenue windfall for a predictable and disastrous long-term erosion to California’s tax base.
The LAO’s language is telling. The exact amount the state would collect is “very hard to predict for many reasons.” A plausible consequence is “that some billionaires decide to leave California.” Such behavioral responses “could” cost “hundreds of millions of dollars or more per year” in lost tax revenue, as the state permanently loses the income and other taxes departing billionaires would have paid.
These warnings expose the wealth tax’s central problems: unreliable revenue projections, permanent tax base erosion from migration, and misguided spending priorities that treat government efficiency problems as funding shortfalls.
First, California is attempting to estimate revenue from a type of tax that consistently falls short of governments’ revenue projections. The LAO projects tens of billions in one-time collections while proponents claim $100 billion. This enormous range reflects a challenge that’s more acute when taxing a person’s bank account than when taxing annual income: governments consistently collect less than forecast because high-net-worth individuals have the means and motivation to avoid it.
Nine of the original twelve OECD countries that imposed wealth taxes since 1990 have repealed them. The reason? Governments consistently collected far less revenue than projected due to taxpayer avoidance and migration. France, Germany, Sweden, and others discovered their forecasts bore little resemblance to reality.
California has experienced its own preview. When Proposition 30 raised top marginal income tax rates by 3 percentage points in 2012, prior research by one of us with Ryan Shyu found that behavioral responses eroded 45 to 61 percent of projected revenues within two years. High earners responded in predictable ways: some restructured their finances to minimize tax liability, others reduced their California income, and many simply left the state.
A wealth tax triggers these same behavioral responses, but with larger effects, because wealth is more mobile than income.
Second, the migration risk poses a compound threat to state finances. The top 0.7 percent of California taxpayers — those earning over $1 million annually — currently pay 35.7 percent of all state income taxes. Ultra-high earners with over $10 million in annual income — just 5,232 individuals — contribute nearly 13 percent of total income tax collections. Scaled to the current fiscal year, these 5,232 taxpayers provide approximately $19 billion in annual income tax revenue.
The wealth tax targets California’s few hundred billionaires, many of whom are also in the highest-annual-income group. So, when the LAO notes that some billionaires are “likely” to leave, they’re not just describing a loss of one-time wealth tax collections, but a permanent loss of substantial, recurring annual income-tax revenue.
Our research on post-Proposition 30 migration patterns shows high earners increasingly choosing zero-income-tax states like Texas, Nevada, and Florida. During the Tax Cuts and Jobs Act period, $4 billion in taxable income left California, as the state and local taxes that California taxpayers could deduct on their federal tax returns became capped at $10,000 per year. During COVID, that figure reached $11 billion. A wealth tax would accelerate this exodus.
Despite its warning, the LAO understates the significance. When it projects “hundreds of millions of dollars or more per year” in lost income tax revenue, the phrase “or more” is doing considerable work in that sentence.
The billionaire tax’s “one-time” label offers no credible commitment, and billionaires know it. They make decisions based on policy trajectories, not political promises. Once California establishes the principle of taxing accumulated wealth, the die is cast. When they depart, California loses more than ongoing contributions to income, property, and sales tax bases. It loses capital investment and job creation within the state.
Third, the spending justification for this tax doesn’t withstand scrutiny. The initiative directs 90 percent of collections to health care services. California devotes $108 billion annually to health and human services, supplemented by $124 billion in federal funding. Federal Medicaid cuts will diminish that federal portion by $7.8 billion in 2027-28 and $15.6 billion annually by 2029-30.
Even if the wealth-tax initiative were to raise the proponents’ claimed $100 billion (which the LAO suggests is optimistic), it would cover just one year of current state spending and offer no solution to permanent federal funding losses.
These federal cuts represent a genuine fiscal challenge, but the wealth tax’s temporary revenue bump cannot address ongoing spending obligations. The implications for the state’s income tax base would leave California even more exposed to future fiscal challenges.
The LAO’s measured warnings deserve attention. California already struggles with structural deficits and high dependence on volatile technology sector income. Accelerating the departure of our most economically productive residents makes those challenges worse, not better.
Governor Newsom and other Democratic leaders like San Jose Mayor Matt Mahan, who have signaled opposition, should mount vigorous public education campaigns. California’s fiscal future requires sustainable revenue sources and spending discipline, not desperate measures that trade tomorrow’s tax base for today’s political priorities.
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.