California’s Latest Tax Proposal Puts Innovation at Risk
California says its new billionaire tax is about billionaires.
But buried in the text of a proposed constitutional amendment is something far more consequential: a tax structure that could make it harder for ordinary employees to take equity in startups, discourage founders from building in California, and ultimately do little to solve the healthcare funding problems it was supposedly designed to fix.
The measure is being sold as a one-time tax on extreme wealth. The reality is much messier.
California’s Billionaire Tax Isn’t Really About Billionaires
The 2026 Billionaire Tax Act, a California ballot initiative promoted by the Service Employees International Union–United Healthcare Workers (SEIU–UHW), seeks to tax billionaire net worth rather than income. As written, the measure would amend California’s constitution by removing the state’s existing cap on taxes on intangible personal property. Supporters argue that the tax is necessary to address a large shortfall in funding for healthcare programs.
The act claims that this will be a “one time” tax. But as my colleague Veronique de Rugy has pointed out, a billionaire tax like this won’t address the core issues at the heart of California’s healthcare funding problems: the core issue of state hospitals providing services via Medi-Cal, California’s Medicaid Program, to middle-class Californians and illegal aliens — both groups that shouldn’t qualify for assistance under the program. The factors driving the shortfall are structural, and a tax on wealth cannot address them.
If California’s healthcare spending commitments are unsustainable, the solution must involve reforming those commitments, not simply searching for a new source of tax revenue. The California state government would be better served to more carefully monitor Medi-Cal program participants to ensure that only the poorest Californians – the group originally intended to receive benefits – exclusively qualify. My colleague Jack Salmon points out that in 2015 there were roughly 12 million people on Medi-Cal. Today that figure is about 15 million people or roughly 4-in-10 Californians (a generous figure that includes Medicare claimants). Alternatively, the California state government needs to face some credible commitment that the funding for the Medi-Cali program provided via the California taxpayer can’t exceed the total revenue collected. Jack points out that “California doesn’t actually need new revenue to address the gap that would remain after accepting the OBBBA’s eligibility defaults.” And whether either of those options work, the Federal government could do its part to withhold funds typically dispersed as a match to state Medicaid funds.
One Provision Deserves Particular Attention
The measure states: “For any interests that confer voting or other direct control rights, the percentage of the business entity owned by the taxpayer shall be presumed to be not less than the taxpayer’s percentage of the overall voting or other direct control rights.”
It further provides:
“Notwithstanding any other provisions of the Constitution, the Act provides for taxation on all forms of personal and wealth, whether tangible or intangible, and allows for the classification of personal property and wealth for differential taxation or for exemption, for the purpose of imposing the on-time tax on the wealth of California billionaires. Personal property and wealth that is so taxed includes, but is not limited to, shares of capital stock, bonds or other evidences of indebtedness, and any legal or equitable interest therein.”
Provisions like this are significant for targeting wealth in forms like capital stock and intangible assets. Targeting intangible assets like equity endanger innovation as equity is typically included in compensation packages. Equity compensation awards individuals for the risk they take by giving them a stake in the company they work for. It aligns incentives towards shared goals of company growth regardless of the ultimate outcome -- whether that’s going public and seeking greater capital investment or seeking an acquirer. Taxes like these distort these incentives and inhibit productive potential as employers think twice about equity awards if employees demand higher salaries in anticipation of wealth taxes like this. This slows innovation. This slows economic growth.
Why Compensation Matters
Startup founders are often compensated through equity in the companies they build. This usually takes the form of Class A or Class B shares, which carry voting privileges not afforded to holders of other classes of equity. These are called super-voting shares.
Under California’s proposed billionaire tax, equity held by founders and their employees would be taxed because it would fall within the measure’s definition of “capital stock” and other intangible assets. Recent analysis by the Tax Foundation illustrates the potential burden for six of the top tech founders. While some have expressed no issue with the measure, it is clear they don’t speak for everyone.
One such dissenter is Google co-founder Sergey Brin, whose family sought refuge from the Soviet Union. In an interview with The New York Times, he offered perhaps the strongest public language against the proposal: “I fled socialism with my family in 1979 and know the devastating, oppressive society it created in the Soviet Union. I don’t want California to end up in the same place.”
Brin’s rebuke is born out of concern for a place of great affection and deep understanding of what it takes for young people to succeed and innovation to advance. He doesn’t point to the hardship of the rich under Socialism, but all people. A policy like this has far reaching consequences beyond billionaires as their middle class employees shoulder burdens they can’t bear.
Equity Isn’t Cash
It should also be said that not every founder is a billionaire with spare cash to plug the crater of fiscal irresponsibility created by the state of California.
Taxing equity assumes that shares are liquid enough to generate the cash necessary to pay the tax. In many cases they are not. Taxing equity would be catastrophic, especially for the middle class involved in new ventures.
The Billionaire Tax Hurts the Middle Class
There are a few reasons for this. One is that it’s bad for talent recruitment.
Founders are not the only ones who are awarded equity as a part of their compensation packages: Non-founder employees pour their lives into the companies they work for, devote their time and talents to building something new that takes long nights, weekends and bends intellectual capacity well beyond the average worker (and as an average worker, there’s nothing wrong with being average!). Their passion powers their work.
One such example of innovative companies making average and often unsuspecting employees millionaires is Space X, which went public late last week. The tough, risky, and innovative work of Founders who have the need and capacity to employ large groups of people with necessary skills enables people like Juan Hernandez, a welder at Space X, to become a millionaire when the company went public. While Space X isn’t headquartered in California, Elon Musk’s other companies once called The Golden State home. It’s painful to imagine all the other people like Juan who are in California and are hampered in their ability to build generational wealth because irresponsible bureaucrats refuse to reign in reckless healthcare spending. Innovation and the strength of American capital markets work together to make the American dream a reality for everyday people regardless of where one starts out. It’s important that the American people aren’t penalized for simply participating in our markets.
Taxing equity in this manner gives innovators pause when deciding to start a new venture and adds friction to a potential employee’s decision to join a new venture in a way that shouldn’t be a second thought. Withholding the capacity for a share in the project they’re responsible for building drives high value talent away from ambitious projects and stalls economic growth.
The other reason this supposed billionaire tax will likely fall on middle-class workers is that ultra-high-net-worth and high-net-worth individuals possess the capacity to not only move their money but move themselves and their productive efforts to other places entirely.
We have repeated evidence to suggest that efforts like these in other blue states drive out the state’s tax base. My colleague Jack Salmon has pointed out the track record of such policies and the impact here.
Moving to different states or countries affords founders and potential employees more amenable environments that allow businesses to not only select their compensation arrangements to attract top talent, but to avoid uncertain and volatile business environments that endanger aspects of their core business (i.e. any kind of regulation on energy, environmental usage, etc.).
We’ve Seen This Before
This isn’t the first time our nation has flirted with a tax proposal targeting high earners.
The Affordable Care Act of 2010 included a provision for a 3.8% net investment income tax (called the ACA surcharge tax). This tax broadly applied to filers with incomes of $200,000 for single filers, or $250,000 for couples filing jointly. This tax included unearned income including investment income such as taxable interest income, dividends, realized capital gains, nonqualified annuities, rents, royalties, passive income from business activities, and undistributed net investment income from a trust or estate.
Worse yet, like the ACA Surcharge Tax, this proposed tax isn’t inflation adjusted either. In the case of the ACA Surcharge Tax, that means that eventually, middle-class people — people intended to have been excluded from the burden — will end up paying it. Jack Salmon discusses this in depth here.
The Billionaire Tax Can’t Solve the Spending Problem
The truth is this: When government projects promise services funded by other people’s money, the spigot of taxpayer funding can’t stop. And what starts as a promise of a running faucet can quickly become a firehose when programs lack accountability and core issues are never addressed.
That is exactly the challenge California faces today. Continuing to tax average earners will not solve the state’s healthcare funding shortfall, and dreaming up new taxes targeting billionaires — a category too broad to avoid — is likely to hamper economic growth. California’s proposed billionaire tax risks discouraging investment, entrepreneurship, and innovation: the very activities that generate economic growth and prosperity. This is true for individuals, the state of California, and as the popularity of taxes like this grow, the nation more broadly.
Innovation and the ability to take risks and receive one’s due reward for such risk taking is integral to the American spirit and to an American growth strategy. So-called billionaire taxes endanger the progress that grows the economy for everyone and enables irresponsible government spending.