California voters will decide on Proposition 40, a proposal for “a one-time 5-percent tax on the worldwide net worth of individuals exceeding $1 billion,” this November. 

The measure’s obligation reaches backward to January 1, 2026, so any billionaire who was a California resident this year could owe a tax on the value of covered assets on December 31, 2026. Californians are essentially being asked to approve a tax whose residency trigger has already passed, and whose tax base doesn’t exist yet. 

A cadre of Nobel Prize winners justify support of Proposition 40 as “modest relative to the gains made by billionaires, yet large enough to offset the federal cuts to Medicaid.” Supporters of the proposition claim that the wealth tax can bring in $100 billion. A recent paper from Benjamin Jaros and Joshua Rauh, however, estimates what the tax could actually collect significantly more modestly: about $30 billion, within the full range of $28 to $36 billion. Jaros and Rauh note that this range also accounts for taxpayer migration and the long term loss of income tax revenue. That includes a “litigation survival discount” on the portion of taxpayers who stay to fight, and is validated by the wealth tax base elasticity literature. They note that the permanent loss of annual income tax revenues would offset the one-time wealth tax revenue.  

Jaros and Rauh’s analysis received a response from economist Gabriel Zucman, attempting to claim that Jaros and Rauh’s assumption of tax flight was unfounded. Jaros, Rauh, and others responded. Zucman wrote:

Why would billionaires permanently leave California in response to a one-time tax owed if they lived there on January 1, 2026? It would only make sense for them to leave if the tax becomes annual. But if the tax becomes annual, it would also generate revenue annually — by virtue of, well, being annual.  

Mr. Zucman is missing that the billionaires facing the wealth tax are strategic planners who can afford excellent advice. They will not wait around to see if Sacramento’s appetite grows.

What is Wealth? Can it Be Taxed? 

A wealth tax applies a tax rate to an individual’s net wealth (the market value of total owned assets minus liabilities) and is applied to net wealth above a certain threshold. While appearing straightforward, however, those eager to enact a wealth tax will find that it can be difficult to define wealth, let alone measure it accurately. 

A wealth tax requires lawmakers to decide which resources count as wealth, who owns them, and how to put a dollar value on them. The IRS defines “net worth” as total assets minus debts and mortgages (“mortgages, liens, and other debts of the individual”). The complications begin once a law must specify what belongs on each side of the calculation. 

While some assets (such as real estate and personal property) can be reasonably appraised, other forms of wealth can prove more difficult. Determining the value of bank accounts or financial assets heavily depends on when the valuation takes place, because their value fluctuates over time. Other assets such as fine art, wine, or jewelry do not have a readily available market value because there is often not a liquid market that can be referenced for valuation purposes. Any attempt to value these kinds of assets involves a degree of subjectivity. 

Proposition 40 runs into similar difficulties. It proposes taxing worldwide assets of taxpayers and their spouses (the spouse’s residency does not matter), minus permitted debts. Directly owned real estate, somewhat unexpectedly, would be excluded from the wealth tabulation, but property held through a corporation would be reflected in the value of its shares. The tax treatment of a building depends on how the owner holds it. 

Proposition 40 attempts to value private businesses by adding the company’s book value to 7.5 times its average annual accounting profits and then multiplying that sum by the taxpayer’s presumed ownership share. Those calculations, however, might differ from what buyers would actually pay for the business based on expected future earnings and risks. 

The proposition’s attempts to determine ownership further complicate matters. The Revenue and Taxation code states that when a non-publicly traded business interest carries voting or other direct control rights, the taxpayer’s ownership percentage is presumed to be “no less than” the taxpayer’s share of the entity’s overall voting or direct control rights.  

Suppose that formula values a private company at $2 billion. Its founder holds 10 percent of the economic interest but controls 60 percent of the votes. If the founder’s stake were valued strictly according to the 10 percent economic ownership, the calculation would be $200 million. If the founder’s stake were valued using the proposal’s voting rights presumption, it would be valued according to the 60 percent share of the votes, or $1.2 billion. The same company could produce a sixfold difference in the founder’s presumed taxable interest depending on whether the calculation follows economic ownership or voting control. If slammed with a tax, the taxpayer or the state’s Franchise Tax Board must produce a certified appraisal to overturn the tax calculation. 

The measure also instructs appraisers to disregard forced-sale prices (which often fall below normal market prices) despite the fact that the imposed wealth tax may well force an owner to sell assets or borrow against them. 

Wealthy taxpayers are left facing a tough choice. Exemptions can treat comparable assets differently, while valuation formulas can produce assessments that owners dispute. Some may be able to challenge the tax through an appraisal, with additional work and money fronted by the state. Before officials can collect a wealth tax, they must settle disagreements over what’s being taxed and what it’s worth. 

A One-Time Windfall?  

In the proposal for Proposition 40, Jasper Boll, Emmanuel Saez, and Gabriel Zucman estimate that Proposition 40 could collect roughly $100 billion. In their paper this month, Jaros and Rauh estimate the net present value of collections to be closer to $30 billion. The Legislative Analyst’s Office, California’s nonpartisan fiscal adviser, found concurring results: “The state probably would collect tens of billions of dollars from the wealth tax” that was spread over several years of collections. The office also noted the strong possibility of declining state income tax revenues, and the need for “tens of millions of dollars per year” to administer the wealth tax. That tradeoff can hardly deliver the windfall that wealth tax advocates promise. 

In a Substack post, Jaros, Rauh, and others respond to criticisms recently raised by Gabriel Zucman on X (formerly Twitter). Many billionaires have already left California, with some citing the potential wealth tax as the reason. Even if the wealth tax survives legal challenges (specifically the legality of a retroactive valuation), Rauh and Jaros note that billionaires leaving California will result in massive income tax revenue losses of $3.3 to $5.8 billion annually and growing. 

The exodus of (especially high-net-worth) taxpayers will place greater strain on the already strained California budget. In September, Governor Gavin Newsom vetoed a bill that would increase post-retirement benefits for police and firefighters, citing a pension crisis and budgeting woes. Additionally, Medi-Cal, the California Medicaid Program, takes up 35.1 percent of California’s total expenditures, making it the single largest line item in the state budget. 

Research from Rauh and others also finds that Medi-Cal spending nearly tripled after 2011 and that most anticipated federal reductions would occur after 2030, long after the wealth tax was collected. Meanwhile, California continues to face recurring budget deficits despite recent revenue booms. A one-time wealth tax may, at best, postpone some difficult budget cuts, but it will not permanently reconcile recurring spending with recurring revenue. 

The Politics of “Just This Once” 

Jaros and Rauh state in Section 6 of the paper, “If the state of California votes to enact this tax, and if it is sustained by the courts, the constitutional barrier to future wealth taxation is removed, and the state’s ability to commit to not enacting additional wealth taxes is substantially diminished.” Once lawmakers and interest groups develop a taste for wealth taxes, they will predictably try for more in the future. 

These concerns are not unfounded. Saez and Zucman have explicitly called for “a permanent wealth tax down the road.” Additionally, the use of the wealth tax revenue on Medicaid, a recurring budget commitment, makes future wealth taxes all the more tempting, especially when the federal cuts to Medicaid do not begin until 2030. 

Interest groups would also be prepared to mobilize and advocate for future wealth taxes. The SEIU-United Healthcare Workers West sponsored Proposition 40, and health care programs would receive 90 percent of its proceeds. An organized constituency has serious motivation to campaign for something that clearly benefits them while dispersing the costs among Californians. 

California’s income tax changes provide a cautionary tale. In 2012, voters approved Proposition 30, an increase on the existing 9.3 percent personal income tax rates on higher incomes through the end of 2018. These temporary increases were then extended through 2030, when voters approved Proposition 55 in 2016. Once government spending has been promised, it is tempting for policymakers to turn “one time” into “one more time.” 

Wealth Is Mobile — and It Moves 

Mark Zuckerberg, CEO and founder of Meta Platforms, recently struck a deal with the company after expressing an intention to leave California for Florida over the possibility of Proposition 40. Meta gave Zuckerberg non-voting shares that he can sell to foot the wealth tax should Proposition 40 pass, in exchange for a promise to reside in California, near Meta headquarters, for eight years. 

Wealth tax advocates who point to this episode as an example of billionaires being able to “pay their fair share” are missing the bigger picture. People can only be paid to stick around for so long. California’s spending obligations are still massive and thousands of Californians of all incomes have taken notice and left the state.  

The Golden State exodus will likely continue until Sacramento revises its tactics. The more people, companies, and investments leave the state, the more California will struggle to meet its obligations. If the tax encourages high-income residents to leave, the state could sacrifice future income-tax revenue for a short-term infusion of funds. California still thinks it can tax and spend its way out of its budget woes, but wealth doesn’t stick around where it’s under attack.