A new analysis indicates that in 85 percent of plausible scenarios, state revenue declines as affluent residents depart.
A plan to impose a wealth tax on California’s ultra-rich may have unintended consequences, potentially draining the state of tens of billions over time.
Should the levy prompt richer residents to relocate, annual lost income tax revenues could fall between $1 billion and $3.5 billion, per a working paper released this week. Stanford scholars Benjamin Jaros and Joshua Rauh caution that the wealth tax could ultimately cost California as much as $39 billion in total.
“These findings suggest that the Billionaire Tax Act will not fulfill the primary functions for which it was designed,” Jaros and Rauh write.
Californian voters are set to decide next month on a one-time 5% levy as part of Proposition 40. The measure has split Democrats: Governor Gavin Newsom opposes it, while progressive Representative Ro Khanna (D–Calif.) calls it “the most consequential ballot measure in America and a fight for the soul of our party.”
It’s already prompting several billionaires to leave the state, including venture capitalist Peter Thiel and Google co-founder Larry Page. Collectively, the seven billionaires who have publicly announced departures account for more than $539 billion of the roughly $1.9 trillion total net worth held by California’s billionaires, the researchers note.
With more departures likely occurring quietly, the new study estimates the tax would raise about $30 billion, far short of the $100 billion that supporters anticipate. The “behavioral response” among California’s billionaires has eroded most of the projected tax base, the researchers write.
That revenue figure is still substantial, but in the long run the state would likely be the loser.
After running 100,000 simulations with varied assumptions, the authors report that “85 percent of plausible outcomes produce a negative” result for state revenue.
Other recent experiments with wealth-focused levies have backfired in similar fashion. In response to Washington State’s new wealth tax, Jeff Bezos relocated to Florida, and Seattle’s Starbucks shifted a larger portion of its corporate headquarters to Tennessee. Studies also link Massachusetts’ “millionaires tax” to capital fleeing the state.
Capital remains highly mobile, despite policymakers’ best efforts. And for a billionaire resident of California, staying put may not be the most logical choice.
Polls indicate a tight divide among voters regarding Proposition 40. A Politico poll released earlier this month showed 46 percent planning to support the measure while 43 percent opposed. Voters were similarly divided when asked whether they expect it to pass or not.
