Why California’s One-Time Wealth Tax Won’t Work

Taxing ultra-high earners won’t result in more revenue but in more wealthy residents leaving the state

California is considering a ballot initiative that would impose a one-time 5% tax on the net worth of state residents with at least $1 billion in wealth. The tax would be assessed based on residency as of January 1, 2026, and payable beginning in 2027. Supporters argue that the tax would raise tens of billions of dollars to offset projected shortfalls in healthcare funding, while affecting only a small number of ultra-wealthy individuals.

The state’s own fiscal analysts are more circumspect. The Legislative Analyst’s Office notes that the revenue is temporary, difficult to forecast, and likely to be offset in part by an ongoing reduction in income-tax receipts if high earners respond by changing their behavior or relocating. This caveat is not incidental but presents the central economic problem with wealth taxation, and it is precisely where California’s proposal begins to unravel.

The defining feature of the initiative is not its rate or rhetoric, but its structure. Tax liability hinges on whether an individual is deemed a California resident on a specific date, which converts the tax proposal into a coordination problem. It does not require mass emigration to affect revenues. It merely requires that a small number of taxpayers, whose contributions already dominate the state’s revenue base, decide that continued residency is no longer worth the risk.

Recent reactions illustrate this mechanism in real time. High-profile investors have publicly criticized the proposal, and some firms and individuals are actively preparing contingency plans, including establishing residences or operations outside the state. While it is true that hard data showing large-scale billionaire flight in response to this specific initiative do not yet exist, this potential objection from the proposal’s supporters misunderstands how tax-induced behavioral responses work.

Economic Effects Operate at the Margin

A wealth tax that applies based on residency at a single point in time incentivizes preemptive planning, legal restructuring and the creation of outside options. Whether those options are exercised by 5% or 20% of the affected population is fiscally decisive in a state whose revenue system is already highly concentrated.

California’s reliance on high earners is unusually extreme. A small fraction of taxpayers accounts for a disproportionate share of personal income tax receipts, with the top 1% typically contributing 40-50% of all state income tax receipts. And this doesn’t account for their indirect contributions through business ownership, capital formation, venture finance and firm leadership. Losing even a handful of these high-earning taxpayers meaningfully alters revenue volatility, particularly given California’s dependence on capital gains realizations.

Combined federal and state income taxes are already well above a marginal rate of 50% for high-earning California taxpayers. This burden makes the state less competitive and results in the net loss of tens of thousands of high-income taxpayers every year. In 2022 alone, the state lost, on net, over 60,000 individuals with incomes above $200,000.

“One-Time” Does Not Eliminate the Core Economic Problems

Proponents of the wealth tax often respond that it is “one-time,” as if this feature resolves the deeper issues associated with taxing net worth. On the contrary, a one-time wealth tax still requires the state to determine the fair market value of assets that are not regularly traded, including private equity stakes, closely held businesses, intellectual property, artwork and complex trust arrangements. Exempting real estate and retirement accounts does not eliminate these difficulties; it simply narrows the tax base while encouraging portfolio shifts into favored categories.

Nor does the one-time framing eliminate the cash-flow problem. Much billionaire wealth exists in illiquid or semi-liquid form. Paying a 5% levy will often require selling equity or borrowing against assets. If assets are sold, capital gains taxes apply on top of the wealth tax. If prices later decline, no adjustment is made. Gains are taxed when convenient for the state, while losses are ignored. This asymmetry is not a technical detail but a defining feature of taxing paper wealth.

Administrative and Enforcement Implications

Determining residency for high-net-worth individuals is notoriously contentious, and California has a long history of aggressive, and costly, residency disputes. When the stakes rise from millions of dollars to tens of billions, enforcement will not become cleaner or more predictable, but more adversarial. That reality alone should temper expectations about net revenue.

Supporters argue that even if some revenue is lost to behavioral responses, the tax would still raise enough to justify its adoption. This claim assumes away the most important fiscal constraint California faces: Temporary revenue cannot sustainably finance long-term commitments, especially when it simultaneously undermines the broader tax base.

Ninety percent of the proceeds from the wealth tax would be earmarked for healthcare spending, which is largely outside the state’s normal budget framework. This allocation allows advocates to frame the tax as a targeted fix for projected Medicaid pressures. But the state’s own analysts have noted that the gap attributed to federal policy changes is modest relative to California’s overall fiscal imbalance. The deeper issue is that the state’s spending growth has persistently outrun stable revenue growth. A one-time levy on a narrow, mobile base does not solve that problem.

The International Record

Economic theory demonstrates the downsides of wealth taxes, but such taxes are not merely a theoretical novelty. Over the past century, more than a dozen advanced economies have experimented with them. Most repealed them after discovering that they raised less revenue than projected, encouraged capital and taxpayer flight, and imposed substantial administrative costs. These outcomes were not accidents. They reflected the basic economics of taxing a base that is difficult to measure and highly responsive to incentives.

California’s proposal differs from these foreign experiments in scale and branding, but not in substance. It relies on optimistic assumptions about compliance, static behavior and revenue durability that are contradicted by both theory and experience. The early reaction from affected taxpayers—strategic flight—is the expected response to a policy that explicitly conditions liability on where people choose to live at a particular moment.

The Fiscal Tradeoff Policymakers Quietly Acknowledge

The most telling feature of the current debate is that even political leaders who are otherwise sympathetic to higher taxes have expressed unease about state-level wealth taxation. California Governor Gavin Newsom, for example, has consistently opposed a state wealth tax. That hesitation reflects an implicit recognition of the underlying tradeoff. A fiscal system that depends heavily on a small number of high earners cannot treat their presence as immaterial.

A wealth tax does not begin to fail when revenue falls short of projections. It becomes problematic when it introduces a new layer of uncertainty around residency, valuation and future tax treatment for the taxpayers who disproportionately finance the system. In that sense, the risk posed by California’s one-time wealth tax is that it conditions fiscal stability on the mistaken assumption that highly mobile taxpayers will tolerate that uncertainty without changing their behavior.