Wealth taxes proposed in multiple states that billionaires, millionaires, and middle class are leaving (e.g., CA, CT, IL, NY) are a fiscal gamble.
Having been thwarted at the federal level, Progressives are now turning to states to implement a wealth tax, with California taking the lead. But whether Progressives can repeat their success with state and local-level $15 minimum wage laws remains to be seen.
During the 2020 Presidential primary campaign, Senators Bernie Sanders and Elizabeth Warren both proposed federal taxes on the assets of high‐net‐worth individuals. Sanders and Warren bowed out of the primaries in favor of now‐President Biden, who did not propose a wealth tax per se, but instead offered a minimum income tax on households with net worth exceeding $100 million. The White House’s original Build Back Better framework contained a similar proposal, but no special taxes on ultra‐wealthy individuals or families made it into the final legislation, renamed the Inflation Reduction Act.
With the return of divided government, any wealth tax proposal has no chance of advancing at the federal level, leaving advocates to focus on states. But a challenge with state wealth taxes is that they are easily avoided by moving across state lines.
California State Assembly Member Alex Lee (D‑San Jose), the Golden State’s main legislative advocate of wealth taxes, is aware of this concern and has both policy and rhetorical responses. On the policy side, Lee is collaborating with legislators in Connecticut, Hawaii, Nevada, New York, Maryland, Illinois, and Washington to offer parallel wealth tax measures to his AB 259. If multiple states enact the same tax, it will be harder to avoid (although as the Wall Street Journal notes there are differences between the various state proposals).
But the list of collaborators leaves out several states that have been attracting migrants from California, including Idaho, Utah, Texas, Tennessee, and Florida.
Although Nevada is on the list of supporting states, its legislative session does not begin until February 6th and so no legislation has been filed as of this writing. Further, with a Republican Governor and a non‐veto‐proof Democratic majority in the State Senate, it is hard to see how a wealth tax could be adopted by Nevada in 2023 or 2024.
That may be crucial because Nevada, with its lack of an income tax and proximity to the Golden State, has been drawing wealthy Californians for many years. Incline Village, a Census Designated Place on the Nevada side of Lake Tahoe has been attracting billionaires since the days of Howard Hughes and, more recently, became a vacation home for Meta’s Mark Zuckerberg.
Assembly Member Lee denies that “wealthy flight” is a serious worry, stating in his release: “despite the fear mongering, the people that are leaving California aren’t the wealthy — in fact, California ranks among the lowest for residents with incomes above $200,000 leaving their respective states.” Lee’s assertion relies on a research preview from the Center for Budget Policy Priorities (CBPP) which says: “California, a higher‐tax state often cited in tax flight claims, ranks among the lowest of states in terms of residents with incomes above $200,000 leaving in an average year, from 2011 to 2020.”
The CBPP preview does not provide underlying data, so this claim is difficult to assess. IRS data for 2020 show that almost 37,000 taxpayers in the $200,000+ category left the state; more than double the number that entered. My Cato colleague Chris Edwards found that California had the third worst ratio of high income taxpayer inflows‐to‐outflows, just above New York and Illinois.
Further, CBPP’s analysis does not include 2021 and 2022, years in which many professionals and entrepreneurs reached the conclusion that physical location no longer matters so much.
The reality is that data on $200,000+ income earners tell us little about how individuals will react to a wealth tax. The vast majority of individuals in the $200,000+ income bracket cited by Lee and CBPP have not accumulated the $50 million of wealth needed to trigger California’s wealth tax, so statistics at that level of imprecision are minimally useful.
We do know that Forbes found that the number of California billionaires fell from 189 in 2021 to 186 in 2022 due to relocations. In prior years, Elon Musk and Larry Ellison, among the world’s ten richest individuals, both left the state. Absent any history of state wealth taxes, we do not know how many more would leave if Lee’s tax measure passes.
But, if the wealth tax drives out even a few of the top billionaires, the revenue implications could be catastrophic. Although many of the ultra‐rich shield their income from taxation, many more pay California’s maximum 13.3 percent income tax. If a large cohort of these individuals leave, the state will not only miss the opportunity to collect the wealth tax but could also lose billions of income tax revenue.
With the state swinging from large surpluses to substantial deficits, now is not a great time to take fiscal gambles. Instead of seeking innovative ways to collect more tax revenue, California legislators (and their counterparts in other high tax states) should be looking for opportunities to eliminate wasteful spending. Other states have demonstrated the ability to provide a sufficiently high level of public services to attract Californians (and New Yorkers and Illinoisans) while taxing away a much lower proportion of state personal income. They should serve as a model for California policymakers.
Originally published by the Cato Institute. Republished with permission under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License.
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