California voters might soon be asked to consider a wealth tax, which might sound like a good idea, but it’s not.
Seriously, it’s not.
Fueled by the self interest of Service Employees International Union–United Healthcare Workers West, the measure would implement a 5% tax on net worth for billionaires living in the state as of the first of the year to fund healthcare expenditures in the state.
And guess what? SEIU-UHW would be a primary beneficiary, with almost all of the proceeds of the tax directed to the healthcare sector.
The measure exposes the easily-corrupted nature of ballot measures in California, where a special interest group like SEIU-UHW can effectively remove billions of dollars from a few individuals and then get politicians the special interest group funded and endorsed to give the money back to the special interest group through government expenditures.
A virtuous circle this ain’t.
The process is bad; the policy is not much better.
First, California’s state government is not hurting for money. For perspective, the state’s budget has grown around 60% since 2019, Newsom’s first year in office. It’s hard to make a case that the state needs more money and it’s even harder to make the case that the state would use more money wisely. But, believe it or not, a wealth tax would actually make matters worse.
There’s no question a sudden windfall of cash like the proposed wealth tax would lead policymakers to sidestep any tough decisions related to the budget and would instead lead to new or boosted spending commitments, but a wealth tax could actually lead to less revenue.
Billionaires already pay a significant amount of taxes. In fact, the top 1% of earners, pay approximately half of the state’s total income tax revenue.
According to the non-partisan Legislative Analyst’s Office, and common sense, a wealth tax would probably drive at least some billionaires out of the state. In fact, a few, including tech mogul Peter Thiel, have already threatened to move (with Thiel already increasing his presence in Miami).
Sure there would be the one time infusion of cash from the wealth tax if it were to pass, but the loss of any billionaires would hurt the state’s budget year after year, since billionaires pay so much in taxes.
“The reduction in state revenues from these kinds of responses could be hundreds of millions of dollars or more per year,” according to the LAO’s analysis. “This would mean less money for the state’s general budget that supports education, health care, prisons, and other services.”
The fundamental flaw with a wealth tax is that it goes after unrealized gains based on stock valuations. Not only are these valuations highly volatile (stocks are up one day and down the next), but unrealized gains means the money doesn’t actually exist. In order to pay the tax bill, billionaires would likely have to sell assets, like stock. For entrepreneurs growing businesses, this would be a big problem.
“This will kill startups and innovation in California since a founder is illiquid while instantly on the hook for $100M,” Silicon Valley venture capitalist Garry Tan posted on X.
This is not a new idea, and Tan and others are just not theorizing. France abandoned its wealth tax, as did Sweden, Germany, Denmark and the Netherlands. All ran into issues: The taxes didn’t generate enough income, were tough to administer or illegal, drove away wealth and/or hurt the overall economy.
The wealth tax measure, which needs nearly 900,000 signatures in the next few months to qualify for the upcoming election, is billed as one time. But temporary is forever when it comes to taxation.
Another measure competing to be on the upcoming ballot is a permanent extension of Prop 30 from 2012, which was a “temporary” tax on top earners to fund schools at the urging of teachers unions (and others). This was “temporarily” extended in 2016. And if the California Teachers Association gets its way this tax will become temporary permanently.
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Supporters will say that a wealth tax is needed to make sure everyone gets a taste of booming wealth, but the path to equity comes from a healthy economy that doesn’t disincentivize success.
The wealth tax proposal is a terrible idea. Californians should turn towards solutions promoting a healthy economy and reject this special interest money grab.
Matt Fleming is an opinion columnist with Southern California News Group. Follow him on X at @flemingwords or email him at flemingwords@gmail.com.
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