Wealth Taxes and Millionaires' Taxes

A proposed California wealth tax initiative is still months away from making the ballot, but it has already driven multiple high-profile billionaires out of the Golden State. Meanwhile in Washington, where the state constitution has historically been understood as restricting income taxes, the governor has announced his support for a 9.9% income tax on high earners. Lawmakers in Rhode Island, Virginia, and elsewhere are poised to give similar proposals serious consideration. And in Michigan, a proposed ballot measure could put a 9.25% income tax in front of the voters.

A fault line is emerging between the majority of states that have cut individual income taxes in pursuit of greater tax competitiveness and a minority of states that are doubling down on high taxes on high earners. We are headed toward a new reality in which there is no such thing as a “typical” rate—just low rates and high rates.

Today I want to share four I’ve written recently on these proposed taxes on high earners:

• A recent paper exploring six provisions of the proposed California wealth tax that dramatically overstate taxpayers’ net worth.

• A blog post explaining how the proposed millionaires’ tax in Washington would undercut small business owners, startups, and tech employees.

• A new paper out today, co-authored with my Tax Foundation colleagues Janelle Fritts and Nicole Fox, estimating the effects of the proposed Michigan high earners’ tax on job creation, migration, gross state product, and innovation.

• An op-ed, reprinted below, on the state economic harms of wealth taxation.

Although these pieces are specific to California, Michigan, and Washington, much of the analysis should be valuable in the context of proposals in other states as well. (If you’re interested in analysis for your state, please get in touch.)

Proposed Wealth Tax Creates Long-Term Budget Risks for California

This op-ed originally ran in the Orange County Register on January 14th.

California’s proposed wealth tax has reportedly already driven at least six billionaires out of state, and proponents haven’t even started collecting signatures yet. The preemptive exodus, and the prospect of significantly more departures later, illustrates the initiative’s fiscal risk: not only revenue under the new tax, but also sustained collections from California’s existing taxes, hinge on the decisions of a small number of highly mobile individuals who are being incentivized to leave.

As the nonpartisan Legislative Analyst’s Office noted in its evaluation of the initiative, the new tax would yield a temporary state revenue increase from the wealth tax but a “likely ongoing decrease in state income tax revenues.” A half-dozen billionaires have already left. Many more might depart if the initiative appears to have a good shot at passage, and still more would leave if it’s ratified by voters. Even with passage, moreover, the tax’s prospects are uncertain given the inevitable legal challenges. California could lose a significant share of its billionaires – and many other high earners with them – over a tax that might never generate a dime.

California’s tax system is uniquely susceptible to this risk because it relies so heavily on high earners. If billionaires leave and if they take other high earners with them, California’s top-heavy tax system would take a substantial hit. Filers with more than $1 million in annual income were responsible for around 40 percent of California’s personal income tax collections by 2019, and those with $5 million or more in income – fewer than 10,500 filers – paid 20 percent of the income tax. At a rough estimate, the state’s 200 wealthiest households, those potentially subject to the wealth tax, likely remit $5 billion or more each year in income taxes on their own.

If billionaires leave California to avoid the wealth tax, they won’t just uproot themselves. For each billionaire departure, many other high-paying jobs will follow, as cities like Austin, Phoenix, and Tampa Bay become magnets for departing tech executives, employees, and investors.

High earners tend to cluster around growing businesses and venture capitalists. If senior executives and major investors depart, they will take offices, enterprises, and, over time, high-paid employees with them. And in a state where the loss of 10,500 people would wipe out $25 billion just in personal income tax collections (based on current revenue estimates), to say nothing of revenue from other taxes, it wouldn’t take that many departures to create an ongoing budget crisis. Losing even a fraction of the state’s high earners creates a budget hole that the wealth tax cannot fill, and isn’t even designed to fill.

The proposed initiative is a one-time tax with earmarked revenue. Even if it were not tied up in litigation, its collections would not offset reduced revenue for education and other core government services. And whereas the initiative creates a one-time wealth tax, an exodus of jobs and high earners (including not just billionaires but also many other highly paid employees, particularly in the tech industry) yields lower revenue year after year. That puts pressure on school budgets (since about 40 percent of personal income tax revenue goes to education) and all other state government functions.

Under the initiative, wealth tax liability is based on residency as of January 1, 2026. However, no one is confident that this retroactive and non-proportional “snapshot” residency requirement will withstand legal scrutiny. That includes the initiative’s drafters, who included language asking courts to substitute later dates if legally necessary to preserve the tax. Billionaires could move later in the year – even after Election Day – in the expectation that the courts would revise the residency requirement.

Under the wealth tax proposal, California is at risk of losing something it can’t easily recover: not just a specific set of billionaires who may never return, but the state’s seeming inevitability as the hub for new tech investment and innovation.

Other cities and states have long chipped away at Silicon Valley’s edge, but California’s fortunes rose in tandem with the rise of artificial intelligence. If some of the tech industry’s leading figures depart to avoid a one-time wealth tax that may never even go into effect, other states’ technology hubs – the country’s Silicon Hills, Slopes, and Prairies – will be the ballot measure’s true winners, and California’s economy and state budget its losers.

Obligatory Marketing Note

My new consultancy provides tax policy research, writing, and other services, both project-specific and on retainer (or in visiting fellow-style roles). If you are in the market for tax policy research or know someone who is, please let me know.

Please Share this Substack

If you find this Substack valuable, please do me a favor and share it with colleagues and others who may be interested. And if you haven’t yet subscribed (it’s free), please consider doing so!