California voters will decide in November whether to impose a one-time 5% tax on residents and trusts with net worth of more than $1 billion.
The proposal is highly controversial, with opponents on both sides of the aisle warning it would be the first of its kind in the nation and would be a body blow to the state’s competitiveness. But one of the proposal’s authors insists California will be fine.
“I think California is likely to be better off if this bill passes than if it were passed,” said David Gammage, a law professor at the University of Missouri. Mr. Gammage helped craft the proposal for the Service Employees International Union (SEIU) and led the effort to pass it.
Gammage told CNBC that the tax is supposed to offset health care savings from President Trump’s so-called “Big Beautiful Act,” and will help maintain California’s standard of living.
“Businesses thrive in places and states where people want to live, and to be a place where people want to live, we need a health care system that works for Californians,” he said.
Why Gavin Newsom opposes a wealth tax
Even without taxes, California has no shortage of competitive challenges. The state finished 17th overall in this year’s CNBC America’s “Top States for Business” ranking, thanks to the nation’s highest cost of living, fifth-highest cost of doing business, and fourth-worst state ranking for business friendliness, which measures a state’s regulatory system.
The state ranks 29th in quality of life, thanks in part to its health care. California ranks 48th in primary care providers per capita, according to the United Health Foundation.
Democratic Gov. Gavin Newsom, who is eyeing a 2028 presidential run, has fiercely opposed the wealth tax proposal, arguing it would force businesses and their owners to pack up.
“Wealth is mobile and we shop for the state with the lowest taxes,” Newsom wrote in a Substack post last month, arguing for a national wealth tax instead.
A review of the proposal by the state’s nonpartisan Legislative Analysis Service late last year suggested the governor had a point. He said the state would initially see a windfall benefit.
“States will likely collect tens of billions of dollars in wealth taxes,” the study says.
But he says the payoff will come soon.
“Some billionaires may decide to leave California. The income taxes they currently pay to the state would be eliminated by leaving California. The loss in state revenue from this type of response could be hundreds of millions of dollars or more per year.”
The Democratic candidate to replace the term-limited governor, former U.S. Health and Human Services Secretary Xavier Becerra, also opposes the tax, largely because of the way the bill is framed.
Republican candidate Steve Hilton, a former television commentator, said the tax would “ruin” the state by forcing out people who create more wealth.
The Norwegian example shows the combined effects
Gamage said fears of a population exodus are overblown, based on experience elsewhere where taxes have been targeted at the wealthy.
“Sometimes you see people retiring, especially as they get closer to their retirement years. They’ve already cashed out their business, they’re somewhat retired, and they tend to move to Florida, sometimes Texas, sometimes Hawaii,” he said.
More important to competitiveness, he said, is creating an environment for building “the next wave of wealth.”
“We want a state whose education system is attractive to workers and whose health care system is attractive as a place to live,” he said.
Gamage pointed to Norway, which has been taxing wealth since 1892, but raised taxes significantly five years ago.
“Some people have left Norway, but it is relatively small compared to their income,” he said. “The Norwegian wealth tax is raising a lot of revenue. The Norwegian economy is doing very well.”
In fact, according to the World Bank, Norway’s economy grew by just 1.1% last year, with growth expected to be roughly flat in 2023, the year after the hike took effect. Meanwhile, wealthy people were fleeing Norway.
More wealthy Norwegians left the country in 2022 and 2023 than in all of 2014-2021, a “518% increase”, according to a report by Civita, a centre-right think tank in Norway.
In 2024, Norway closed a loophole in its 37.8% exit tax on migrants, in an apparent attempt to stem the flow.
According to the World Bank, Norway still has a budget surplus (albeit narrowing) and income inequality is among the lowest in the developed world.
“You can argue whether it was a little good or a little bad for the Norwegian economy,” Gamage said. “There is no doubt that it is making a lot of money and has not destroyed the Norwegian economy.”
Google founder Sergey Brin doesn’t leave things to chance
California Rep. Ro Khanna, an avid tax supporter who is considering a presidential run himself, wrote on X in December that California’s tradition of innovation will keep businesses and their leaders in the state.
“The idea that people would not start companies or take advantage of innovation clusters to make billions if their incredible wealth was taxed at 1% to 2% defies common sense and economic theory,” he wrote.
In fact, the proposal is a one-time 5% tax, rather than a 1-2% tax. Taxpayers can choose to pay in five installments, but in that case an additional 7.5% late fee will be charged.
In California, many people don’t want to leave their results to chance.
Google co-founder Sergey Brin, who has already moved his headquarters to Nevada in case the tax passes, has poured tens of millions of dollars into Building a Better California, a nonprofit that supports a ballot measure that would effectively nullify the wealth tax.
Some labor groups also oppose the tax.
“This policy does not provide the sustained, long-term funding that our schools and communities deserve,” the California Teachers Association wrote last month.
But some California billionaires have no problem with taxes.
Businessman Tom Steyer, who ran unsuccessfully for governor in the June primary, called for taxes on “billionaires like me.”
NVIDIA CEO Jensen Huang, who could face a nearly $8 billion tax bill if the bill passes, said in January that he was “absolutely fine.”
Other states and localities will also be watching closely, especially those that already have tax measures targeting the wealthy, such as Washington state and Massachusetts. New York City Mayor Zoran Mamdani has already pushed for a so-called “pied-a-terre tax” on luxury homes and proposed a series of other wealth tax measures to fill the city’s budget gap.
California has long had an inconsistent ranking in CNBC’s competitiveness rankings. It has an advantage when it comes to technology, innovation and access to capital, but is near the bottom when it comes to regulation and costs. This suggests that wealthy entrepreneurs are willing to put up with some things in order to continue living and doing business in the state. It remains to be seen whether they will survive a direct attack on their wealth.
