California's 'Billionaire Tax' Could Bite Harder Than Advertised
The proposed tax is already driving people and businesses to flee the state.
California's potential adoption of a one-time 5 percent "billionaire tax" on the net worth of high-value individuals is already sending wealthy residents fleeing for the exits. By one estimate, at least a trillion dollars has moved beyond the reach of state officials. But a new analysis says the tax may be even more onerous than advertised. Californians may need to get used to the sight of moving vans leaving the state.
You are reading The Rattler from J.D. Tuccille and Reason. Get more of J.D.'s commentary on government overreach and threats to everyday liberty.
Give Us 5 Percent of Everything You Own
Sponsored by a chapter of the Service Employees International Union, the proposed billionaire tax is set to appear as an initiative on the California ballot in November. According to the summary approved by state Attorney General Rob Bonta, the measure "imposes one-time tax of up to 5% on taxpayers and trusts with covered assets valued over $1 billion; covered assets include businesses, securities, art, collectibles, and intellectual property, but exclude real property and some pensions and retirement accounts." If passed, the tax would apply to people resident in California as of January 1, 2026—a retroactive element bound to be challenged in court.
The ostensible purpose of the tax, per its sponsors, is to "save California's healthcare system from collapse," though money is fungible and the state has spent itself into an $18 billion deficit for the 2026–2027 budget, according to the nonpartisan Legislative Analyst's Office.
That 5-percent skim of total assets based on the estimated value of current holdings could force those affected to sell stocks and other holdings to cover the bill, diluting and potentially losing control of companies they own. After all, estimated value isn't cash in hand. That has many of those targeted by the tax looking for new homes for themselves and their businesses beyond the state border.
People and Money Flee Across the Border
According to The Washington Post's Elizabeth Dwoskin and Caroline O'Donovan, "a slew of founders and other ultra-wealthy industry leaders are reducing their ties with the state." They named David Sacks, Peter Thiel, Larry Page, and Sergey Brin among those who are severing connections to California.
While the tax is specifically targeted at billionaires, lower-worth entrepreneurs are also reportedly leaving. They're worried that the state's political environment has turned against business creation and that it will be safer to invest elsewhere.
"The total wealth that has left California is now $1T," prominent venture capitalist Chamath Palihapitiya posted on X January 10. "We had $2T of billionaire wealth just a few weeks ago. Now, 50% of that wealth has left - taking their income tax revenue, sales tax revenue, real estate tax revenue and all their staffs (and their salaries and income taxes) with them."
But while advocates of the tax alternately scoff and fume at the exodus of wealthy businesspeople, the reality of the tax could be even worse than feared. A recent analysis says the proposed tax bites harder than its proponents admit. That could push yet more wealth out of California.
Five Percent Understates the Pain
"The 2026 Billionaire Tax Act, a California ballot initiative, would ostensibly impose a one-time tax of 5 percent on the net worth of the state's billionaires," notes Jared Walczak for the Tax Foundation. "Due, however, to aggressive design choices and possible drafting errors, the actual rate on taxpayers' net worth could be dramatically higher. One particularly momentous policy choice has the potential to strip the founders of some of the world's largest companies of their controlling interests and force them to sell off a significant portion of their shares."
According to Walczak, there are many ways in which the initiative creates situations under which "tax liability would be vastly more than 5 percent of net worth." He focuses on six of them: valuations based on voting interests; assessment rules that can overvalue privately held businesses; excessive underpayment penalties that encourage overvaluing privately held businesses; anti-avoidance rules that tax more than the amount of transfers; provisions on spousal assets and debt to relatives that would tax nonresidents' assets; and deferrals that would tax wealth that no longer exists.
As an example, Walczak points to the initiative's means for valuing voting shares that aren't publicly traded. DoorDash founder Tony Xu owns 2.6 percent of the company but controls 57.6 percent of voting rights. The initiative specifies, "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."
That means Xu could be taxed on his voting rights rather than his economic stake in the company. That turns a $2.41 billion ownership interest into a $4.17 billion tax liability. It could force the conversion of voting shares to common stock for sale (subject to capital gains tax), and loss of control of the company.
The other provisions examined by Walczak also impose potential tax liabilities far beyond the 5 percent claimed by the initiative's sponsors.
High Taxes Historically Fuel Migration
Few people have much affection for billionaires these days. But when has a tax targeted at the ultra-wealthy ever remained focused on them? The federal income tax was introduced in 1913 to "soak the rich" but politicians soon extended it to average earners. Now most of us file with the IRS every year. Assumptions that the billionaire tax would follow the same pattern drive many would-be entrepreneurs to seek greener pastures for what they hope will be successful business ventures.
"If the initiative passes, California must brace for an exodus of founders and investors fleeing not just extraordinarily high tax burdens, but also the potential loss of the companies they created," warns Walczak.
None of this should be a surprise. Research demonstrates that Americans tend to migrate from higher tax states to those with less burdensome regimes. In 2024, summarizing an economic paper examining state-level tax policies from 1900 to 2010, the University of California-Riverside noted, "the introduction of income tax in the post-World War II era led to out-migration by wealthy Americans" from states that imposed the tax. "Implementing higher taxes was not well accepted by many wealthy Americans—their higher income allows them to be more mobile, and therefore able to seek new residency in states with lower personal income tax or no tax."
Even before the adoption of the more-painful-than-advertised billionaire tax, California is in the process of relearning an old lesson. All things considered, people prefer to be taxed less. If they have the means to do so, they'll move from places that treat them like milking cows to friendlier environs.