Economists Clash Over $39 Billion Cost of California's Billionaire Tax

California voters face a choice on November 3 that could reshape the state's fiscal identity. Proposition 40 proposes a one-time, 5% tax on the net worth of billionaires. The measure targets individuals who were residents of the state on January 1, 2026. Revenue would primarily fund health care for low-income Californians to offset federal Medicaid cuts.

The proposal marks a sharp turn from the tax restraint established by Proposition 13 in 1978. That earlier initiative slashed property taxes and helped launch a national movement for lower rates. Now, a group backed by $333 million from the superrich is campaigning to defeat the new measure. The money was reported in The New York Times. The vote could determine if California becomes the first state in the nation to impose a wealth tax.

Two major economic studies offer conflicting predictions for the state budget. Gabriel Zucman of UC Berkeley and co-authors Jasper Boll and Emmanuel Saez estimate the tax will generate approximately $100 billion. They base this figure on $2.3 trillion in billionaire wealth as of mid-2026. Their calculation deducts 10% to account for avoidance and evasion.

Joshua Rauh of Stanford University and co-author Benjamin Jaros dispute this estimate. They argue the tax will cost California $39 billion. Rauh claims at least seven prominent residents, including Larry Page and Sergey Brin, have already established residency elsewhere to escape the levy. He estimates those departures alone reduce potential revenue by $30 billion. Zucman counters that legal experts believe these moves may not satisfy residency requirements, noting that Brin still commutes to Silicon Valley.

Rauh also predicts legal challenges will further reduce revenue. He argues the tax's retroactive nature and its reach into global assets may violate constitutional protections. Zucman points to Norway, which has maintained a wealth tax since 1892. A recent working paper found that recent tax increases in Norway drove at most 100 wealthy residents to leave without significantly denting revenue.

The debate hinges on whether past wealth taxes, which Zucman calls abject failures, can be improved. Prop 40 includes provisions to tax business holdings and uses a retroactive date to limit movement. Voters will decide whether to adopt this experimental approach or maintain the current income tax structure.