Economists raise alarm on California wealth tax

There is wide opposition to Proposition 40, the “billionaire tax,” among economists, both Democrat and Republican.

Last week, I led a group of over 100 economists — including Nobel Laureates, former senior government officials and academics — in signing a letter opposing Proposition 40.

The economists, who were already on the record against the tax, believe it’s simply bad public policy. Some worked during Bill Clinton’s administration; some worked for George W. Bush and some have worked for President Donald Trump. That gives you a sense of how bipartisan this opposition is.

Where do we start? Similar wealth taxes have been adopted by about a dozen countries in the past few decades, and nearly all of them have been abandoned for a similar list of reasons.

Wealth taxes don’t make a very good form of tax. Why? The tax base is highly mobile. Unlike property taxes, sales taxes and income taxes, it’s very easy to change one’s residence to avoid a wealth tax. Investment, capital and firms can move very easily to avoid such a tax.

There are quite a few issues with California’s Proposition 40 wealth tax in particular: For one thing, it may not be legal. It would be retroactive, hitting all California residents as of Jan. 1, 2026, even though it would be approved almost a year later. It’s not clear that a retroactive tax can pass legal and constitutional muster, even as a “one-time” tax.

Oh, and there really is no such thing as a “one-time” tax. That’s why California voters are facing Proposition 3, which would make an earlier “one-time” income tax hike on the state’s highest earners permanent.

From an administrative standpoint, administering the “billionaire tax” would require lots of accountants and experts merely to value the assets of billionaires, much of which are illiquid. The California state government can’t seem to be able to build a mile of railroad track, so administering a complicated wealth tax could similarly prove very difficult.

The other enormous repercussion would be forcing billionaire entrepreneurs to sell their illiquid stakes in their companies, which may have further negative economic effects, such as tanking share prices, for example.

For all of these reasons and more, economists are opposed to the California wealth tax. Even though the tariff could raise tens of billions of dollars in the first year, it would have such negative, long-lasting effects on California’s image as a place to invest that the cost would outweigh any short-term benefit.

Even Democrats like Mark Cuban have said they won’t invest in California startups any more if the billionaire tax passes.

At least seven billionaires have left California already, in a public way, and that number could continue to grow. There may also be others who have left quietly already.

California Gov. Gavin Newsom himself opposes Proposition 40, and even is supporting Proposition 42, which would cancel the “billionaire tax” and ban future wealth taxes.

Jon Hartley is a visiting fellow at the Hoover Institution and an assistant professor of economics at the UT-Austin School of Civic Leadership.

Download The California Post App, follow us on social, and subscribe to our newsletters