Structural Problems with Healthcare Won't be Solved by Chasing Away California's Biggest Contributors

A new campaign in California for the Billionaire Tax is warning voters that hospitals and emergency rooms will begin shutting down unless the state taxes billionaires more aggressively. One advertisement declares, in PSA-style urgency, “This is not a drill.” The claim is that unless the wealthy are forced to “pay their fair share,” hospitals across the state will close and emergency room wait times will surge.

It is an alarming message. It is also deeply misleading.

The basic premise, that the survival of California’s hospitals depends on whether the state taxes billionaires more heavily, simply does not hold up to economic scrutiny. Hospitals do not close because wealthy people pay too little in taxes. Hospitals close when their costs exceed their revenues, and those revenues are determined primarily by the structure of government health programs such as Medicare and Medicaid.

The real problem is structural, and it has been building for decades. California’s Medi-Cal program has expanded dramatically and well beyond the traditional Medicaid population, including to undocumented immigrants, adding billions in ongoing obligations. Enrollment has grown substantially, and the cost pressures that come with it compound every year. Meanwhile, the third-party payment system at the heart of both public and private insurance insulates patients from the true cost of care, removes competitive pressure on providers, and generates the kind of chronic cost inflation that no tax increase can solve. Reimbursement rates are a symptom of this deeper dysfunction, not the root cause, and simply paying providers more within the existing system would add cost without fixing the incentives that drive it. The hospitals will face the same pressures the year after any new tax as the year before it because the tax does nothing to change the system producing those pressures.

The political narrative also ignores a basic fact about California’s tax system: the wealthy already carry a disproportionate share of the burden. California has the highest top marginal state income tax rate in the country, at 13.3 percent, and effectively 14.4 percent for wage income above $1 million once the payroll tax is included. The state’s income tax system is steeply progressive. In recent years, the top 1 percent of earners has contributed close to 40 percent of all personal income tax receipts, and in peak years that share has approached half. In a state of 40 million people, that means roughly 150,000 taxpayers are financing an outsized share of public services.

In other words, the claim that billionaires are somehow paying less than “working families” is rhetorical framing, not an accurate description of who finances California’s government.

More importantly, designing public finances around a narrow slice of taxpayers creates a different risk entirely: volatility. When a state becomes heavily dependent on a small group of high earners, revenue becomes extremely sensitive to economic cycles, market fluctuations, and migration decisions. That is precisely why California has lurched between budget surpluses and fiscal crises in ways that more broadly-based tax systems do not.

Proponents of the billionaire tax describe it as a one-time measure, a single, exceptional levy to address an urgent fiscal need. But that framing deserves scrutiny. California has a long and well-documented history of temporary tax increases that prove rather more permanent than advertised. Proposition 30, sold as a temporary measure in 2012, was extended in 2016 and again in subsequent years. The “one-time” framing is not a structural limit on what the policy can become. It is an opening bid.

And that brings us to the biggest flaw in the billionaire tax proposal.

As Jack Salmon has documented on this substack, wealth taxes are terrible taxes even judged by the standard set by those who want them (if you ignore their desire to punish the rich just because they are rich). A new study from the Hoover Institution’s Josh Rauh and his coauthors warns that a California wealth tax is likely to produce the opposite of its intended effect. Wealth taxes tend to raise far less revenue than advertised because the tax base is highly mobile. High-net-worth individuals have both the means and the incentives to relocate, restructure assets, or otherwise reduce exposure to the tax. Six publicly confirmed departures before the January 1 residency snapshot alone removed nearly 30 percent of the projected tax base before the tax even passed. Accounting for likely but unannounced relocations, the Hoover researchers project actual collections of roughly $40 billion; less than half of the advertised $100 billion figure. More damaging still, when researchers calculated the present value of the future income tax revenue California would forgo by driving those taxpayers out permanently, the wealth tax likely produces a negative net fiscal return. The state will end up worse off than if it had never enacted the tax at all.

This is just the beginning, as Michael Solana has shown, more billionaires will flee California.

When that happens, governments do not merely lose the expected revenue from the wealth tax itself. They also lose something far more important: the income tax base that those same individuals were already contributing.

This is not theoretical speculation. In 1990, about a dozen European countries had a wealth tax. By 2019, all but three had repealed or sharply curtailed them after discovering that the taxes produced modest revenue while accelerating capital flight and reducing investment. California faces the same risk in more acute form. Because the state already relies so heavily on high earners for income tax revenue, the departure of even a relatively small number of wealthy taxpayers could have significant and lasting fiscal consequences. That reality makes the hospital argument particularly implausible. If policymakers are genuinely worried about the stability of healthcare funding, tying it to one of the most volatile and mobile tax bases imaginable is precisely the wrong approach.