Californians to Vote on a Revenue-Losing Tax
Last week, the union backing the ballot initiative to establish a “one-time,” 5% tax on the net worth of California billionaires announced that it had gathered the necessary signatures for the initiative to appear on the ballot. Barring a last-minute deal, the question now heads to California voters this November.
While economic damage and outmigration that usually come in the wake of tax increases cause long-term harm to a state’s tax base, it is rare that a tax hike is so poorly designed that it actually loses a state money in the short term. Rare, but not impossible, as this latest effort by California has so artfully demonstrated.
Advocates of the tax had estimated that it would gain the state $100 billion in additional revenue. But researchers at Stanford’s Hoover Institution ran a more exhaustive study that found that, not only would the tax raise less than half that amount, but lost revenue from other taxes due to outmigration would mean that it would end up costing the state $25 billion.
The California Tax Foundation came to a similar conclusion, estimating an annual loss of $3.3 to $4.5 billion in revenue. To put that into perspective, NTUF estimates that, before the words “wealth tax” were ever spoken in California, California was set to lose about $4 billion in state and local revenue in 2026 due to net outmigration among all income groups. Doubling the scale of an already devastating drain on the state’s finances would be catastrophic to California’s ability to raise the revenue it needs to support current spending levels.
The worst part for California is that it may well suffer all of the consequences of billionaire outmigration with none of the revenue benefits. The proposed tax is rife with constitutional vulnerabilities—likely violating the:
- Due Process Clause - due to its retroactive application and apportionment of out-of-state wealth to California
- Commerce Clause - again, for taxing assets entirely outside the state of California
- Takings Clause - for explicitly targeting around 200 taxpayers to fund health care for the whole state, and
- Excessive Fines Clause - for onerous penalties for good-faith valuation disagreements, including potential multi-million dollar fines that can be levied upon appraisers who certify valuations that California’s Franchise Tax Board disagrees with
These are just a few of the legal challenges that California would face should the tax go into effect, with the likely consequence that the state would expend significant resources to collect and administer a tax that it would eventually be forced by courts to refund.
It’s all a reason why a wealth tax is bad medicine whether one’s primary goal is to raise more revenue or focus on promoting competitiveness and economic growth. The ballot initiative set to go before California voters this November would work against both objectives.
Pied-à-terre or Pied-à-fuir?
New York City Mayor Zohran Mamdani has provoked controversy by announcing a plan to implement a pied-à-terre tax, which is a special tax on luxury secondary residences. Mamdani’s social media video announcing the new tax even explicitly singled out billionaire Ken Griffin’s $238 million penthouse.
But social media slapfights aside, Mamdani hopes the tax will raise $500 million to help close the city’s budget deficit. But that may be far too optimistic.
A report by the city’s comptroller suggests that, after accounting for wealthy residents cutting their last ties to the city and other behavioral changes, the tax may only end up raising $340 million. And that’s not accounting for impacts on other sources of revenue, such as the income tax or traditional property tax.
All this stands in direct contrast to Governor Kathy Hochul’s recent plea for “patriotic millionaires” to return to the Empire State to undo the erosion of the state’s tax base—even as she acknowledged that the exodus was due to New York’s uncompetitive tax policies.
The absurdity of hoping that asking nicely for rich people to return to New York while doubling down on the tax policies that pushed millionaires out in the first place is surely not lost on them. If the goal is to bring back people who left for Florida, a special tax targeting their last remaining toehold in New York is surely the worst way to accomplish it.