California Can’t Afford the Reckless Gamble of a Billionaire Tax

The allure of a simple tax on the ultra-rich is undeniable. California, a state of immense prosperity, simultaneously struggles with some of the highest rates of wealth inequality in the nation.

Yet the proposed California Billionaire Tax Act is a profoundly ill-conceived measure that threatens to inflict more damage than it promises relief. Far from a silver bullet for the state’s finances, it would introduce radical complexity, guarantee legal chaos, and virtually assure an exodus of high-wealth residents if enacted—all for the sake of one-time revenue that fails to address the problems California faces.

The measure proposes a one-time 5% tax on the assets of the state’s billionaires to mainly fund health care, purporting to address the funding crisis driven by cost shifts to states and working families that resulted from H.R. 1, the massive federal tax package enacted last July.

H.R. 1 fundamentally changed the ongoing federal-state cost sharing of health care. The measure has raised health insurance premiums for millions of Californians and will reduce billions of dollars in federal funding annually for state health-care programs. While this systemic federal funding cut demands a response, a one-time levy on 200-plus people is neither a durable nor a predictable solution.

The fundamental flaw of the California proposal is its foundational shift away from the state’s established income tax system. It proposes a completely new method of taxation based on the valuation of all assets, not just realized income. This is a massive, unprecedented leap for a state.

Income tax works because it levies a tax on money that has been earned and received. A wealth tax, by contrast, requires the state to determine the fair market value of complex, illiquid, and often privately held assets—from shares in private companies to art collections and real estate holdings.

This fundamental departure from the realization principle of taxation is far more likely to result in the outmigration of high-wealth individuals than it is to make headway in effectively addressing the state’s fiscal needs. These citizens have both the means and the motive to establish residency elsewhere rather than face a tax bill based on subjective valuations.

Public reports have already indicated that several of the state’s billionaires have begun departure planning in anticipation of the ballot measure’s existence—before a single vote is cast.

Furthermore, California’s current income tax system benefits from cooperative enforcement. The Franchise Tax Board works in concert with the IRS and taxing entities in other states to share information and ensure tax compliance. With the California Billionaire Tax Act, the state would have zero partners. No other state, and certainly not the federal government, has a similar structure.

The state would instead shoulder the entire burden of auditing sophisticated wealth reports, valuing unique assets, and litigating disputes on its own—a bureaucratic nightmare that would require massive, immediate investment in specialized personnel and technology.

There would inevitably be immediate legal challenges to the face of the measure itself, questioning its constitutionality and statutory authority. Beyond that, the nature of a wealth tax all but guarantees that every taxpayer subject to the tax would challenge their individual valuation. The complexity and subjective nature of asset appraisal mean disputes would be virtually certain.

This tidal wave of litigation would tie up the courts, consume state legal resources, and, critically, delay any substantial revenue from being raised for years, rendering the promised funding unreliable and speculative. This delay means the funds wouldn’t be timely enough to address the immediate fiscal impacts of H.R. 1.

The instinct to make the wealthy pay more is defensible. But the California billionaire tax proposal wouldn’t work. The right fight for addressing the inequity is in Washington. The federal preferential rate on long-term capital gains—20%, versus a top ordinary income rate of 37%—is a massive subsidy to wealth and the reason Warren Buffett famously pays a lower effective tax rate than his secretary.

There is an unassailable equity argument against taxing income from a stock sale at half the rate applied to a standard paycheck. And crucially, the federal government has an advantage that California doesn’t: You can’t move to Nevada to escape it.

While wealth taxation demands significant and careful policy analysis and debate, the California Billionaire Tax Act, by contrast, is a reckless gamble. Californians need a real plan to address fiscal stability and the consequences of the federal cost shift to states, not a profoundly flawed measure that undermines the current tax structure.

This proposal carries far too much legal and administrative risk, diverting attention from the sustainable reforms that are needed to protect critical public services in California. We all need to work on reforms that can solve the real issue without creating new ones.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Keely Martin Bosler, founder of Keely MB Strategies Inc., is a former director of California’s Department of Finance for Gov. Gavin Newsom and former cabinet secretary for Gov. Jerry Brown.

Lenny Mendonca, senior partner emeritus at McKinsey & Company, was the chief economic and business adviser to Gov. Gavin Newsom from 2019 to 2020.

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