If California voters approve a ballot measure imposing a wealth tax this November, they will prove two adages. The first: "Wisdom is foreseeing consequences." The second: "We are punished not for our sins, but by them."
The consequences of a one-time wealth tax levying 5% of net worth on California billionaires are already emerging. Some of the top-tier wealthy individuals who have contributed significantly to California's unstable fiscal foundation are already being observed leaving the state. California's wealthiest 1% of taxpayers shoulder roughly 40% of the state's income tax revenue.
American federalism can be described as a system of 50 permanent incentives that foster entrepreneurial governance. Capital and talent are mobile. They go where they are welcomed and stay where they are treated well. Wise states compete with one another to create attractive environments. Foolish states, by contrast, ignore the incentives federalism provides. They denounce such competition as a "race to the bottom." But what they call normal is merely a fantasy land where governments can extract as much money as they wish from wealth that stays put.
Mobility, notably, does not occur only between states. The 2,589 counties where President Donald Trump won a majority in all three of his elections gained 5.4 million people since 2020. The 433 counties won by Democrats Hillary Clinton, Joe Biden and Kamala Harris saw a net loss of 5.43 million people. Among the 50 counties with the largest net population gains, 46 voted for Trump all three times. These Republican-leaning regions likely offered business-friendly environments.
Stanford University's Hoover Institution closely examined California's net worth tax in a March report. The report concluded that the measure would generate only $40 billion in revenue, rather than the $100 billion projected by its supporters. That is because 30% of the tax base — more than $550 billion — has already left California. With more billionaire departures expected, the net present value of the legislation can safely be considered negative. The Hoover Institution noted that "the present value of permanently lost income tax revenue more than offsets the revenue raised by the one-time wealth tax."
Moreover, this is unlikely to be a one-time tax. The measure raises the cap on taxation of intangible personal property without any sunset clause or provision to restore the cap. The Hoover Institution explained that "future ballot initiatives could impose additional wealth taxes at any rate and any threshold," adding that "it is common for measures packaged to voters as temporary or emergency to be repeated or extended."
Philip Hamburger, president of the New Civil Liberties Alliance and a law professor at Columbia University, argued that "California's tax policy is either a taking without compensation or a 'deprivation of property without due process of law' in violation of the Fifth and Fourteenth Amendments." His reasoning is that the wealth tax targets a tiny minority of California residents — roughly 200 billionaires — and is nominally imposed only once, making it closer to confiscation than to taxation, which is typically recurring and broad-based.
One attorney at a global law firm noted that "if the wealth tax is enacted, it could be challenged as a bill of attainder." The U.S. Constitution prohibits such laws that impose punishment on specific individuals or groups without trial. The wealth tax can be called punishment because a majority is targeting an unpopular minority.
In a recent article, Laura Williams of the American Institute for Economic Research (AIER) warned that "a wealth tax would grant sweeping authority to comb through and catalog every item owned by the wealthy." More alarmingly, the infrastructure required to enforce the tax would permanently expand government intrusion and control. This will shrink the sphere of individual autonomy and erode the security of liberty.
Former President Joe Biden said, "Tax increases to expand spending should be borne by two unpopular groups — corporations and the top 2% of earners making more than $400,000 a year." This is why California's wealth tax requires combining the two adages from the first paragraph into one: "Failing to respond wisely to foreseeable consequences is itself a political sin."
