California Wealth Tax: Economists Clash Over Revenue

California voters will decide on Proposition 40, a measure that would impose a one-time 5% tax on the net worth of residents who qualified as billionaires on January 1, 2026. The tax targets assets including stocks, real estate, and personal property, with proceeds earmarked primarily to offset federal cuts to Medicaid for low-income residents. Two prominent economists have published conflicting analyses on the measure's financial impact.

Gabriel Zucman, a professor at UC Berkeley and the Paris School of Economics, co-authored a report estimating the tax will generate approximately $100 billion. He and colleagues Jasper Boll and Emmanuel Saez calculated this figure by applying the 5% rate to their estimate of $2.3 trillion in total billionaire wealth in the state. They reduced that total by 10% to account for potential avoidance, evasion, and residency changes before the cutoff date. Zucman argues that California's billionaire class saw wealth grow by 144% between 2023 and 2025, a surge driven largely by the artificial intelligence boom.

Joshua Rauh, a senior fellow at the Hoover Institution at Stanford University, reached the opposite conclusion. In an analysis with Benjamin Jaros, Rauh estimates Proposition 40 will cost the state $39 billion. He argues that seven high-profile individuals, including Larry Page, Sergey Brin, and Peter Thiel, changed their residency before the January 1, 2026, deadline. Rauh claims these departures removed approximately $30 billion in potential revenue. He also predicts that constitutional challenges will reduce the tax's effectiveness, noting that the retroactive nature of the measure and its extraterritorial reach present legal risks under the current Supreme Court composition.

The dispute centers on whether recent movers have successfully severed their California tax ties. Zucman contends that establishing new residency requires more than a change of address, pointing to examples like Sergey Brin commuting from Nevada to Silicon Valley. Rauh maintains that these individuals have likely secured Nevada residency through proper legal and financial planning. The state's proposed tax differs from previous global attempts by including business holdings and applying retroactively to a specific resident class, aiming to close loopholes that weakened earlier measures like France's pre-2018 wealth tax.

Supporters of the tax have poured $333 million into a campaign group to defeat the measure, according to a recent report in The New York Times. This funding reflects fears among the super-wealthy that a successful California model could trigger similar taxes at the federal and international levels. Zucman views a California victory as a catalyst for a wider movement, while opponents argue the tax will drive capital out of the state and shrink the income tax base. The outcome will determine if California becomes the first U.S. state to levy a direct tax on accumulated wealth rather than income.