Why a one-time wealth tax would be a permanent problem for California | Opinion

California is considering a one-time 5% percent wealth tax on billionaires in the state, courtesy of the Service Employees International Union (SEIU).

Congressman Ro Khanna, who represents the residents of Silicon Valley in Washington, D.C., has been a key national supporter of the proposal. Other national figures are endorsing the SEIU’s policy proposal, most notably Sen. Bernie Sanders, I-Vt.

The wealth tax proposal targets a tiny group of the mega-elite, with proponents claiming it can be used to fund health care and education initiatives in the state. But, before California voters buy into this “quick-fix” policy, they should look across the Atlantic.

Europe’s lessons

Many European countries have been down this road before, and it has only led to dead ends, capital flight and even more unsustainable budgetary issues. Nine European countries have repealed their wealth taxes; only three European countries still implement one.

Take France, for example. The country had a wealth tax from 1982 to 2017, and government officials reported that over 10,000 millionaires worth a combined 35 billion euros left the country. French economist Eric Pichet estimates that the proposal did raise 3.5 billion euros a year; however, the government lost 7 billion euros from capital flight.

More recently, Norway experienced its own issues. Over 30 Norwegian billionaires and mega-millionaires left the country in 2022 — more than the previous 13 years combined. The plan was very similar to California’s proposal. The proposal was expected to raise $146 million in new revenue; however, over $54 billion of capital left the country, leading to a net loss of nearly $450 million.

Voting with their feet

There are many core issues with this policy. First is a practical one: Within a country, it is incredibly easy for people to “vote with their feet” and move to places that align with their preferences. In 2023, the Census Bureau estimates that nearly 7.5 million people moved from one state to another. Research suggests that people tend to move to places with lower taxes and a blossoming entrepreneurial environment.

Millions of people move a year, but it is even easier for the ultra-rich to move as residents, making California’s policy proposal a fool’s errand. Billionaires are disproportionately more likely to have secondary (or more) residences, making the idea of claiming residency in one state quite simple.

California is already hemorrhaging high-quality talent because of the state’s regulatory and tax policies. California’s tax scores finds the state as the third most burdensome in the country, according to the Tax Foundation. Corporate, individual income and sales taxes consistently rank in the bottom 10 in the country. And the Census Bureau found that California had a domestic net out-migration of more than one million from 2020 to 2024.

What happens if billionaires leave

Among those who have already said they are leaving California are two of the richest people in the world: Elon Musk and Larry Ellison. Another layer of tax complexity will only further drive California’s tax base to greener pastures.

In response to the new proposal, billionaires Peter Thiel and Larry Page have threatened to leave the state. Khanna subsequently — and sarcastically — posted to X that he will “miss them very much.”

However, if more billionaires do actually leave the state, Khanna and other California lawmakers will surely miss them, since they are the exact tax base that is needed to fund this proposal. California thrives on innovation and venture capital fueled by visionaries like Page and Thiel, and billionaires are among the largest benefactors for social and charitable causes.

Even Gov. Gavin Newsom opposes this proposal. He understands that billionaire threats are not bluffs, but rather almost a certainty given Europe’s failed track record in this regard. This won’t just impact tax revenues; it will cause a ripple effect on business, philanthropy and a further exodus of capital to friendlier states.

Justin T. Callais, PhD is chief economist at the Archbridge Institute.