California Wealth Tax: Accountant’s Dream, Economist’s Nightmare

The California Billionaire Tax Act has qualified for the November 2026 ballot, promising a massive cash windfall for the state. Proponents confidently declare that it will yield around $100 billion.

On paper the calculation seems a no-brainer. If you take the net worth of California’s billionaires from the Forbes list at the beginning of the year, roughly $2 trillion, and apply the proposed one-time 5 percent wealth tax, you land right around $100 billion.

However, while the arithmetic is straightforward, the economics are shaky. A foundational principle of economics is that individuals respond to incentives. Apply this principle to California’s wealth tax scheme and a different picture emerges.

First, consider how wealth is distributed near the eligibility cutoff. The most common net worth on the list sits around $1.3 billion, and nearly 70 percent of the state’s billionaires hold less than $5 billion. This implies that the vast majority of that population is tightly clustered right above $1 billion.

Those taxpayers would face an overwhelming incentive to legally restructure their assets to land just below the line, leaving their wealth tax-free. Imagine someone with a net worth of $999 million. Under this Act, his wealth-tax liability would be zero. However, if his net worth ticked up by just an additional million, he would be instantly hit with a 5 percent tax on his entire fortune. That minor increase would trigger a staggering $50 million tax bill.

The wealth-tax design would make those million the most expensive dollars in the world, leaving the individual vastly worse off.

When a large group of taxpayers clusters right below a specific line to avoid a tax, economists call it “bunching.” If billionaires can restructure their assets to fall below $1 billion, then we should expect bunching and a corresponding shrinking of the expected tax base.

Second, wealth is concentrated at the peak of the pyramid. Just five individuals account for roughly half of California’s total billionaire wealth. Because these individuals are well past the $1 billion mark, they would not be able to bunch. Instead, their clear incentive would be to change their legal residency.

We are already seeing the beginning of this new exodus. Business entities linked to Google co-founder Larry Page have checked out of California, following high-profile departures such as Elon Musk’s move to Texas and Oracle co-founder Larry Ellison’s move to Florida.

If even a few of these outliers exit, the state wouldn’t just lose the wealth-tax revenue; it would also permanently lose annual income-tax payments, capital-gains-tax revenues, local economic investments, and employment opportunities.

The threat is acute. The Fortune 500 list confirms that Texas has surpassed California as the state hosting the most corporate headquarters (57 to 56). This corporate flight is a continuation of a longer trend. Between 2011 and 2021, California lost 77,600 headquarter jobs due to relocations. Oracle has cut about 3,000 jobs.

Finally, wealth figures from Forbes might be overestimating the actual net worth of billionaires. An IRS study compared Forbes’s figures for the wealthiest Americans against the hard data reported on federal estate tax returns filed when those billionaires passed away. The study found that Forbes’s public estimates were, on average, double the net worth officially reported to the tax man.

Even if passed, the initiative would face immediate litigation because it would be retroactive to January 1 to prevent billionaires from fleeing before the November vote. Legal analysts warn that this would face severe constitutional challenges.

Because much of this wealth is tied directly to the highly volatile tech sector, a sudden market correction could instantly erase tens of billions from the estimated tax revenue. Californians may find that while counting hypothetical billions is easy, actually collecting them is a different story.