Editor's Note: The following commentary piece originally published on Project Syndicate and has been republished on IVN by request of and with permission from the authors.
BERKELEY—Six Nobel laureate economists recently signed an open letter supporting Proposition 40, California’s Billionaire Tax Act, which, if passed by a simple majority of voters, would impose a one-time 5% tax on the wealth of an estimated 250 individuals with a net worth exceeding $1 billion who resided in California on January 1, 2026. We believe the proposal is poorly designed and likely to do more harm than good.
The tax would not apply to billionaires who left the state before the end of 2025, nor to current or future billionaires residing in the state after January 1, 2026, unless another wealth tax passes in the future. Nonetheless, according to its proponents, Prop 40 could generate as much as $100 billion in additional revenues over five years, most of which would be earmarked to cover massive cuts in California’s Medicaid program (a key feature of US President Donald Trump’s “One Big Beautiful Bill”).
Proponents of Prop 40 are right to point out that wealth inequality in the United States is staggering and has grown dramatically in recent years, owing to soaring, and increasingly risky, stock valuations. According to Forbes, there are about 990 billionaires in the US, 60% of whom reside in just four states: California, New York, Texas, and Florida. In California, the AI giants and hyper-scalers are fueling billionaire fortunes and the growing wealth divide.
Owing partly to the Supreme Court’s Citizens United decision, extreme wealth in America today confers extraordinary political power. Millionaires and billionaires can and do influence policy outcomes in many ways, be it through lobbying, campaign contributions, or exchanging favors in the crony-capitalist network that US President Donald Trump and other top government officials have created.
But Prop 40 isn’t the only tax on the ballot this year. If Proposition 3 passes, as we hope it will, California’s “temporary” income tax of 13.3% on top earners passed in 2012 will become permanent, setting it apart from the nine states whose tax on top earners is 0% (including Nevada, Texas, and Florida—all popular destinations for departing Californians).
California already has the most progressive income-tax structure in the country, and it is one of only six states whose tax system reduces income inequality. Income taxes generate more than two-thirds of the general fund revenues that finance the state’s operations, education and other social services, and infrastructure, and the top 1% of earners account for 40–50% of these revenues. California’s income tax applies to both realized capital gains and stock compensation, which rise and fall with the market, resulting in volatile annual revenues.
Textbook economic theory predicts that a large enough tax wedge (the difference between income-tax rates in one jurisdiction compared to another) will cause some residents to choose the lower-tax location. But the evidence on the size of this effect is mixed. When California increased its top marginal rate to 37.3% in 2012, one widely cited study found that the outmigration of top filers increased 42% from 1.5% to 2.1%. Yet the State Franchise Tax Board measured outmigration at only about 0.1%–0.2% of the Californians subject to the higher rate. And despite the 2012 rate hike, in-migration of high-income earners into California remained substantial and continued to increase, drawn by venture capital, research universities, and the kind of elite networks that low-tax states could not provide (and are struggling to create).
Billionaires, however, behave differently. They respond strongly to estate taxes when weighing decisions about where to live. Confirming this prediction, six high-profile billionaires—a small number by headcount, but a large one by wealth—who would have owed about one-quarter of Prop 40’s expected revenues left the state before its residency date, taking their future income-tax payments to California with them.
This is just one example of Prop 40’s poor design. Emmanuel Saez, the economist who devised it, estimates a 10% avoidance rate. Legal scholars differ on the measure’s retroactivity and its constitutionality. Both will be challenged in court, resulting in long delays and budgetary uncertainty about the revenues it will generate. A recent NBER study found that Prop 40 would collect only about $30 billion, less than one-third of the amount predicted by its proponents. And over time, billionaire departures would cost $1 billion to $3.5 billion in lost income taxes. If these losses continue indefinitely, the shortfall in income tax collections would outweigh Prop 40’s one-time tax proceeds, resulting in a net loss of revenues for the state.
In the meantime, Prop 40 would impose a huge new burden on the State Franchise Tax Board, requiring it to examine every billionaire return to determine residency and to establish the amount of wealth to which the 5% duty would be applied. Most will exist as stocks, bonds, and other highly mobile holdings that can quickly move from California to other states or to foreign locations. Since the measure proposes a completely new, untested method of taxation based on the valuation of all assets, not just realized income, the state’s estimates of wealth would inevitably fuel a tidal wave of litigation, rendering the promised funding both speculative and unreliable.
Even if not fully implemented, Prop 40 would send a salient signal to current and future billionaires about what they can expect from the California taxman. Salient signals are defined as those that attract attention because they are distinctive or unexpected, and that affect behavior in suboptimal ways. Billionaires remaining in the state and would-be billionaires could well respond to Prop 40 by accumulating and moving their wealth elsewhere. Future billionaires might still be drawn to launch their startups in California, given its deep pools of talent and venture capital, but if they expect future wealth taxes, they might locate their corporate headquarters, production, and employment elsewhere.
California Governor Gavin Newsom is right to oppose Prop 40. He, too, is troubled by growing wealth inequality and its corrosive effects on the foundations of democracy. But as the governor of the largest US state, which accounts for a disproportionate share of the country’s innovation, he knows that wealth is mobile, and he is alarmed by intensifying state-by-state competition to provide havens for America’s billionaires. If California drives out high-earning taxpayers, it will have to make painful funding cuts to critical state programs.
Newsom has called for a federal approach to wealth taxation. Instead of a tax on billionaires, the US needs to raise taxes on the capital income that feeds wealth. There are a variety of ways to do so: through higher corporate tax rates; through taxes on realized and unrealized capital gains; by closing the most egregious loopholes, like carried interest; and by increasing inheritance taxes.
We hope Californians reject Prop 40 and vote “yes” on Prop 3, which has much greater significance for state revenues over the next five years. And we hope Americans elect a Democratic Congress, which can address growing income and wealth inequality using measures that apply to all the states. Wealth is mobile across state and international borders, and without federal policies, the “race to the bottom” competition among states to provide safe havens for billionaires will intensify.