California’s Wealth Tax Gamble: Jonathan Williams on American Radio Journal

This November, California voters will decide whether to impose what would be the first state-level wealth tax of its kind in the United States. Proposition 40 would retroactively impose a one-time tax of 5% on the worldwide net worth of people who were California residents on January 1st of 2026, with most of the revenue directed towards new healthcare spending. That may sound like a simple way to raise money from people who have plenty of it. But taxes and other policy changes do not operate in a vacuum. They change incentives, and the very people who would respond most to those incentives are precisely the people California would be taxing for most of its targets.

The tax will be paid on stock in publicly traded companies and the value of privately held companies. This wealth is often traditionally called unrealized capital gains.

To understand why this is a big leap, consider the nature of most taxes we already pay. Sales taxes are based on purchases. Personal income taxes are levied on compensation for labor, as well as on actual capital gains after the sale of an investment and dividend payments. And corporate income taxes are generally imposed on profits. The wealth tax, however, would be imposed on gains that exist on paper but are not necessarily at the immediate disposal of their owner.

The argument for Proposition 40 in California is that the state needs more money somehow because federal changes to Medicaid, now called Medi-Cal in California, will reduce federal support. But that argument deserves closer examination.

The federal changes include work requirements for certain able-bodied adults who have no dependents, and restrictions on states’ use of healthcare provider taxes. The latter mechanism allows states to tax healthcare providers, use the proceeds for Medicaid, and then receive federal matching funds. Limiting that practice reduces the amount of federal money California can draw down through the program.

Now, you would think that taxing hospitals would be counterintuitive if you’re trying to make healthcare more accessible because it drives up the cost of care. Instead, it’s a clever scheme from which the state and the hospitals benefit, at least in the short term.

It goes something like this: the state taxes hospitals for revenue. The state then gives a large portion of that money back to the hospitals in the form of supplemental Medicaid payments. The federal government matches such payments at the rate that varies by state, and so the state’s trade of money back and forth with its own hospitals increases the federal contribution to the state.

Unfortunately, all of us federal taxpayers are those that bear the costs when states like California try to game the system like this.

Here’s another problem with the wealth tax idea: California’s tax base is already shrinking. Hoover Institution researchers found that nearly 30 percent of the potential wealth tax base had already left California before the measure even qualified for the ballot. Their best-case estimate is that the tax would raise about $40 billion over five years, rather than the $100 billion claimed by supporters.

More importantly, they estimate that the foregone future income tax revenue stream from departing residents would leave the state with a negative net present value of about $24 billion. This is what happens when a government mistakes a tax base for a captive audience.

California’s billionaires are not pieces of property sitting on a tax assessor’s shelf; they are people who can and many times do move their businesses, investments, income, future economic activity, and even charitable giving with them in many cases.

And the problem is not limited to billionaires. California has already experienced substantial population and income outmigration to other states. People respond to differences in taxes, regulations, housing costs, employment opportunities, and the general business climate.

The relevant question is not whether California can collect money from wealthy residents; it plainly can, at least to some degree in the short term. The question is how much economic activity must leave before the tax produces far more economic damage than any potential benefit from the new revenue to the state.

California’s budget has already demonstrated the danger of relying on volatile revenue sources while expanding permanent spending. The state has faced enormous deficits even during periods of strong revenue growth. A one-time windfall cannot solve a structural spending problem.

California’s past economic success was built by creating opportunities, not by treating economic success and wealth creators as a resource to be confiscated. The same forces that built the Golden State can still revive it, but policies that make investment, entrepreneurship, and residents less attractive risk weakening the very economic base on which California’s tax revenues depend.