California voters will decide in November whether to impose a one-time, 5% tax on settlors and trusts with a net worth of more than $1 billion.
The proposal is highly controversial, with opponents on both sides of the aisle warning that passage of the measure — the first of its kind in the US — would be a major boost to the state’s competitiveness. But one of the proposal’s authors insists California will be fine.
“I think California will be better off if this is passed than not,” said University of Missouri law professor David Gamage, who helped draft the Service Employees International Union (SEIU) proposal, which led to the ballot petition.
Gamage told CNBC the tax, which is supposed to restore health care cuts from President Trump’s so-called “Big Beautiful Bill,” will help maintain California’s standard of living.
“Businesses thrive in places and states where people want to live, and being a place where people want to live requires health systems that serve Californians,” she said.
Why Gavin Newsom opposes the wealth tax
Even without the tax, California faces no shortage of competitive challenges. The state finishes No. 17 overall in this year’s CNBC America’s Top Business for Business rankings, pulled down by the nation’s highest Cost of Living, fifth-highest Cost of Doing Business, and fourth-worst Business Friendliness, which measures the nation’s legal and regulatory regimes.
The state ranks No. 29 for quality of life, in part because of health care — California ranks 48th in primary care providers per capita, according to the United Health Foundation.
The Democratic Alliance government, Gavin Newsom, who is looking to run for president in 2028, strongly opposes the wealth tax proposal, which he said would send businesses and their owners packing.
“Wealth is being siphoned off, and bought to the state at a much lower tax rate,” Newsom wrote in a Substack post last month arguing for a national wealth tax instead.
A study of the proposal by the non-governmental Legislative Analyst’s Office late last year suggests the governor has a point. It says the state will see the storm first.
“The state could potentially collect tens of billions of dollars in wealth taxes,” the study said.
But it says payment will follow soon.
“(I)t is possible that another billion will decide to leave California. The income taxes they currently pay to the state will end when they leave. The reduction in state revenue from these types of responses could be hundreds of millions of dollars or more per year.”
The Democratic nominee to replace the term-limited governor, former US Health and Human Services Secretary Xavier Beccera, also opposes the tax, though mostly because of the way the measure is structured.
Republican nominee Steve Hilton, a former television commentator, said the tax would “destroy” the state by driving away more wealth creators.
The Norwegian example shows mixed results
Gamage said the fear of migration is overblown, based on what happened in other areas targeting the wealthy with taxes.
“You see people sometimes leave, especially when they’re getting close to retirement age. They’ve already cashed out of their business, they’re retired, and they often move to Florida, sometimes Texas, sometimes Hawaii,” he said.
Most important to the competition, he said, is creating space to build “the next wave of wealth.”
“He wants to have a state where the education system makes it attractive to workers, where the health system makes it attractive to be a place to live,” he said.
Gamage pointed to Norway, which has taxed wealth since 1892, but raised the tax significantly in the past five years.
“Some people have left Norway, but it is small compared to their income,” he said. “The Norwegian wealth tax raises a lot of money. The Norwegian economy is doing really well.”
In fact, Norway’s economy grew by just 1.1% last year, according to the World Bank, and growth will almost certainly slow down in 2023, a year after the increase takes effect. Meanwhile, the rich were fleeing Norway.
A report by Norwegian think tank Civita found that more wealthy Norwegians are leaving the country in 2022 and 2023 than between 2014 and 2021 – “a 518% increase.”
In 2024, Norway closed loopholes around its 37.8% exit tax on expatriates, in an apparent attempt to curb the practice.
Still, Norway runs a budget surplus – albeit a shrinking one – and income inequality is among the lowest in the industrialized world, according to the World Bank.
“You can argue whether it has been good or bad for the Norwegian economy,” said Gamage. “There is no doubt that it raises a lot of money and has not destroyed the Norwegian economy.”
Google founder Sergey Brin doesn’t leave things to chance
California Congressman Ro Khanna, a hard-line tax supporter who is considering a run for president, tweeted in December that California’s legacy of innovation will keep its businesses and leaders afloat regardless.
“The idea that companies won’t start making billions, or use a bunch of innovation, if there is a 1-2% tax on their staggering wealth defies common sense and economic theory,” he wrote.
In fact, the proposal is a one-time, 5% tax, not 1-2%. Taxpayers will have the option of paying it in five installments, but that carries an additional 7.5% late fee.
In California, many are unwilling to leave the outcome to chance.
Google founder Sergey Brin, who has already moved his main residence to Nevada in case the tax passes, has poured tens of millions of dollars into “Building a Better California,” a nonprofit organization that supports a ballot measure that would exempt the wealth tax.
Some labor groups also oppose the tax.
“This policy will not provide the sustainable and long-term funding our schools and communities deserve,” the California Teachers Association wrote last month.
But some California millionaires don’t have a problem with the tax.
Businessman Tom Steyer, who ran unsuccessfully for Governor in the June primary, campaigned on taxing “billionaires like me.”
Nvidia CEO Jensen Huang, who could face nearly $8 billion in taxes if the measure passes, said in January that he was “okay with it.”
Other states and municipalities will be watching closely, especially those that have already targeted tax measures for the wealthy, such as Washington and Massachusetts. New York City Mayor Zohran Mamdani has already passed a so-called “pied-a-terre tax” on expensive homes, and has proposed a series of other tax incentives to close the city’s budget gap.
California has long been an anomaly in CNBC’s competitiveness rankings — leading when it comes to Technology and Innovation, and Access to Capital, but near the bottom when it comes to regulation and costs. That suggests that wealthy businessmen are willing to put up with other things in order to continue to live and do business in the government. Whether they will tolerate a direct attack on their wealth remains to be seen.
