California’s proposal to introduce a wealth tax has stirred significant debate among its wealthiest residents and policymakers. Many progressives in the state view taxation as a necessary step to ensure equitable funding for social programs. However, as California grapples with the effects of its already high tax rates, the idea of a new tax targeting billionaires has led to concerns about potential adverse consequences.
The state’s history with taxation has shown that increases can lead to unintended outcomes. In 2012, Californian voters approved Proposition 30, which raised tax rates on high-income households. Initially intended as a temporary measure to address budget deficits during the Great Recession, this tax was further extended by Proposition 55, lasting through 2030. Economists Joshua Rauh and Ryan Shyu noted that these measures prompted high earners to either relocate or find ways to reduce their taxable income, resulting in a significant drop in anticipated tax revenues—45.2 percent within the first year and 60.9 percent within two years.
Despite this troubling precedent, the Service Employees International Union (SEIU) is progressing with plans to introduce a one-time, 5 percent wealth tax specifically targeting billionaires in California. This tax, retroactive to residents as of January 1, 2026, aims to channel funds into health care, encompassing even illiquid assets. The mere discussion of such a tax has led affluent individuals like Google co-founder Larry Page and Palantir co-founder Peter Thiel to reportedly reconsider their residency, highlighting fears that the proposed tax may drive substantial wealth out of the state.
The introduction of a retroactive tax is fraught with legal implications that could provoke challenges in court. Should it survive legal scrutiny, it is likely that pressure will mount for ongoing taxation to meet fiscal demands. Critics of the approach argue that funding systems through one-time taxes is not a viable long-term strategy, indicating a potential cycle of repetitive tax measures.
Some advocates for the wealth tax adopt a populist stance, expressing little regret at the prospect of billionaires relocating to tax-friendly states. However, the experience of other states, such as New Jersey, warns of the fiscal risks associated with losing high-income individuals. The flight of David Tepper, a billionaire who moved to Florida and left a budgetary gap in New Jersey, serves as a cautionary tale for California officials.
Governor Gavin Newsom’s opposition to the wealth tax reflects a broader understanding of the economic challenges that could ensue from driving wealthy residents away. Currently, California’s tax revenue structure is heavily reliant on high-income earners, with over 40 percent of personal income tax revenues sourced from just 1 percent of taxpayers. This dependency makes the state particularly fragile to fluctuations at the top of the income scale.
If billionaires decide to relocate, advocates for the wealth tax may target the next class of affluent individuals who may not possess the same flexibility to leave. As the discussions around the wealth tax continue, California faces a pivotal moment that could shape its economic landscape for years to come. The balance between equitable taxation and maintaining a stable tax base will be crucial in ensuring the state’s continued prosperity.