The Ongoing Cost of a One-Time Wealth Tax
Estimating income and other tax losses due to the California wealth tax
The proposed California wealth tax will raise short-term revenue, but what happens to the rest of California’s tax base after billionaires leave? That’s the question I explore in a new analysis for the California Tax (CalTax) Foundation.
I estimate that ongoing state tax revenue losses from billionaire departures will run between $3.53 billion and $4.49 billion per year, mostly from forgone individual income tax collections, with smaller effects from sales taxes and economic spillovers. Under standard discount rate assumptions, the net present value of these recurring losses outstrips the one-time revenue the initiative’s drafters project from the wealth tax itself, and runs to several multiples of the revenue estimated by a competing analysis.
You can read the full paper here. Downloads of the paper are appreciated—mostly because I think (hope) it’s worth reading, but also because downloads improve the paper’s visibility for others looking for information on the California wealth tax.
My calculations are specific to California, but a similar effect should be anticipated in any other state that contemplates a wealth tax.
There’s a robust debate about whether billionaires will be able to avoid some or all of the wealth tax by relocating out of state. This is true both for departures before the January 1, 2026 “snapshot” residency date, since the California Franchise Tax Board might conclude that domicile has not shifted based on a totality of factors, and also for departures after that date, as courts could very well revise or strike the residency date in the initiative. In a forthcoming Tax Foundation analysis, I plan to explore the many unresolved questions about California residency for wealth tax purposes.
For ongoing liability under other taxes, however, none of this matters. It only matters that billionaires leave, regardless of whether the move is successful in avoiding wealth tax liability. (Of course, they’re leaving because they justifiably believe that this may eliminate their liability.) Many are unlikely to come back—especially if they believe future wealth taxation is on the horizon—and at some point, they will certainly be domiciled elsewhere, depriving California of tax revenue.
That’s what my analysis explores.
In my paper, I divide California’s 212 billionaires into four groups based on their primary source of wealth: public founder equity, private operating businesses, financial fund management, and diversified holdings. These groups differ on three relevant dimensions: mobility, California-source income retention after departure, and employment and investment spillovers from their departures.
Public company founders are highly mobile and retain almost no California-source income after relocating, but their departures produce little employment spillover, since a publicly traded company will not follow its founder. Private operating business owners are less mobile but generate much larger economic spillovers when they do leave, since their employees, suppliers, and operations sometimes move with them. Fund managers fall in between, as do those with diversified holdings.
Notably, with how heavily concentrated billionaire wealth is at the top, departures by those the most motivated to leave can have an outsized impact.
Most of the empirical literature on wealth taxation comes from Europe. This evidence is valuable but will almost certainly understate behavioral responses at the U.S. state level. Crossing state lines is far easier than changing countries, so migration elasticities ought to be considerably higher. Additionally, European wealth taxes also tend to exempt business assets, meaning that the measured response is substantially that of successful small business owners and professionals rather than the founders of large publicly traded companies. My analysis thus considers a range of migration elasticities, regarding the European experience as the floor.
I invite you to read the full paper.
Separately, I also have an op-ed on the philanthropic implications of billionaire outmigration and a Tax Foundation piece explaining why valuation by founders’ voting interests remains a valid concern.
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