To hear some Silicon Valley insiders tell it, California is on the verge of economic suicide. This November, Californians will likely vote on a ballot initiative that would levy a one-off tax on the wealth of about 200 of the state’s richest residents. Garry Tan, the CEO of the start-up incubator Y Combinator, posted on X that the measure would “kill and eat the golden goose of technology startups in California.” Investors and tech executives are threatening to leave the state. Governor Gavin Newsom, who has been angling for a centrist presidential pivot, has vowed to “do what I have to do” to stop the initiative.
Many progressives, however, see the billionaire tax as a long-overdue effort to finally force the ultra-wealthy to pay their fair share. Senator Bernie Sanders, for example, calls it a “model that should be emulated throughout the country.” In their telling, hyperbolic claims about the death of innovation and entrepreneurship in California are a smoke screen for the fact that billionaires simply don’t want to pay higher taxes.
The unfortunate reality for progressive backers of the wealth tax is that what billionaires think about the policy, and how they react to it, will determine whether it succeeds. If voters approve the tax, they will be making a huge bet on billionaire psychology. That would be a very high-stakes wager indeed.
The California wealth-tax idea originated as a response to a federal tax cut. Donald Trump’s One Big Beautiful Bill Act lowered taxes for corporations and rich individuals and paid for those cuts in part by reducing Medicaid spending. That left a roughly $20 billion annual shortfall in California’s health-care budget. If left unfilled, that could cause 1.6 million low-income Californians to lose their health care, according to the Kaiser Family Foundation. In response, one of the state’s largest health-care-employee unions teamed up with a group of progressive economists and lawyers to come up with a way to make up the difference: impose a one-off 5 percent wealth tax on California’s billionaires.
The logic is simple enough: The ultra-wealthy, who amass their fortunes by owning assets as opposed to earning wages, pay very little in income taxes. According to calculations by the Berkeley economist Emmanuel Saez, who helped design the proposal, California’s billionaires pay approximately $3 billion to $4 billion a year in state income taxes, or less than 0.2 percent of their collective net worth of $2.2 trillion. He and the other architects of the ballot initiative determined that tapping into this pool of mostly untaxed wealth would be the most economically fair way to raise the money California needs, especially given that those same billionaires had just received a major tax break from Trump. “Right now our tax system effectively fails to tax the superrich,” Gabriel Zucman, another economist involved with the proposal, told me. “If you want to raise a lot of revenue, you need to focus on wealth.”
One serious objection to imposing a wealth tax at the state level is that it will trigger a process known as capital flight: When faced with the prospect of losing a sizable chunk of their fortune, wealthy individuals might leave the state altogether. If enough people make that choice, a wealth tax could backfire, resulting in lower long-term tax revenues. Many Silicon Valley critics of the ballot initiative have claimed that the proposal would give them virtually no choice but to leave. They say that it would result in massive tax bills that would force founders to sell off their companies, push entrepreneurs into bankruptcy, and ultimately make it impossible to build a successful company in California. “I think the technology industry kind of has to leave the state,” one anonymous venture capitalist told the tech-right publication Pirate Wires. “Because every person running a company will have to look at the math, and they will think, ‘Well obviously that cannot happen because it will literally destroy the company.’”
Already, several high-profile billionaires, including the Google co-founder Larry Page, the Paypal co-founder Peter Thiel, and the Oracle co-founder Larry Ellison, have reportedly begun shifting their assets out of California, and several have threatened to leave if the initiative passes. Andy Fang, a co-founder of DoorDash, claimed on X that the new tax “could wipe me out” and that it would be “irresponsible for me not to plan leaving the state.” (Others, including Nvidia CEO Jensen Huang and Airbnb CEO Brian Chesky, have said that they will remain in California regardless of what happens. “We chose to live in Silicon Valley, and whatever taxes I guess they would like to apply, so be it. I’m perfectly fine with it,” Huang recently told Bloomberg.)
The tax’s designers, however, think they’ve come up with a clever solution to capital flight: a one-off tax that is retroactive, based on a billionaire’s residency status on January 1, 2026. In other words, unless they’ve already fled the state, billionaires won’t be able to move to avoid paying the tax. “At this point, there’s no financial incentive to leave California,” Zucman said. “You’re going to pay the same amount either way.”
Contrary to what its opponents claim, moreover, the tax is carefully designed to avoid the most common objections. If billionaires are worried that the government will improperly value their assets, they can submit independent third-party appraisals. If they can’t come up with the full 5 percent all at once, they can spread out payments over five years, though they would be charged interest. If their fortunes are tied up in “illiquid assets” such as a privately held start-up, they can defer the tax rather than having to sell their stake. “So many of these criticisms are either completely ignorant or made in bad faith,” Brian Galle, a law professor at UC Berkeley who helped write the bill, told me. “I think it’s pretty clear that these guys will basically say anything to protect their giant mountains of wealth.”
Even if the wealth tax wouldn’t nuke the state’s tech start-ups, however, it would roughly quadruple the amount that California’s billionaires currently pay annually in taxes. And if most empirical research suggests that the superrich do not tend to move in response to state-level tax hikes, none of that research has considered a tax nearly as large as what is being proposed in California. “There’s just a different kind of anxiety in the air this time,” Cristobal Young, a sociologist at Cornell University and the author of The Myth of Millionaire Tax Flight, told me. “We’re not talking about paying a little more in income taxes. There’s a lot more at stake and a whole lot of unknowns.”
Part of that anxiety stems from the fact that billionaires don’t believe that the tax will really be one time only. “It’s not a one time; it’s a first time,” David Sacks, a venture capitalist and Trump’s AI czar, recently told CNBC. “And if they get away with it, there’ll be a second time and a third time.” That fear isn’t completely unfounded. In 2012, for instance, California voters approved a ballot initiative to raise the income-tax rate for high-earners for seven years to fill a budget shortfall. In 2016, voters overwhelmingly chose to extend the tax until 2030, and are likely to extend it even further. Voters could very well behave similarly with the wealth tax, especially given that the state’s budget problems probably won’t magically solve themselves in the next few years. “I just don’t think the idea that this will be one time is very credible,” Zachary Liscow, a tax scholar at Yale Law School who worked on a national wealth-tax proposal under the Biden administration, told me. “If this tax is really as successful at bringing in revenue as its proponents claim, I have a hard time imagining voters will just let it go away.”
This is where a debate ostensibly about economics reveals itself to be about political science and behavioral psychology. Proponents of the ballot initiative argue that Silicon Valley’s unmatched ecosystem of founders, investors, and talent is so alluring that no single tax would cause current and would-be billionaires to relocate. “Study after study has shown that the probability of becoming a billion-dollar company is higher in Silicon Valley than anywhere else,” Galle said. “You aren’t going to give that up just because there’s a chance that sometime in the future there’s going to be a tax on your wealth.”
Opponents of the bill, though, worry that the tax will be viewed as a harbinger of a soak-the-rich mentality among California voters that makes the state a risky place to do business. Start-ups and venture-capital investment could begin to flow to lower-tax states; the next hub of technological innovation may end up being seeded in Austin or Miami instead of Silicon Valley. “The real fear is less about the specific tax than the message it sends: that California is a dangerous place to be a billionaire,” Alan Auerbach, an economist at UC Berkeley, told me. “If people begin to fear that California has removed guardrails that allowed the wealthy to do well, they might get nervous and go elsewhere.”
Each side’s argument is rooted in a set of interlocking assumptions about how California voters will vote, how the state’s ultra-wealthy think they will vote, how those predictions will factor into would-be entrepreneurs’ decisions about where to locate their companies, and whether Silicon Valley will retain its unparalleled allure—all in response to a type of tax that has never been tried in the United States before.
For proponents of the proposal, going forward with the wealth tax is worth the risk, if only because the alternative is so much worse. Better to lose a handful of billionaires than for millions of low-income Californians to lose their health care. Other ways to generate the same revenue—such as raising income or corporate taxes, or cutting other parts of the budget—come with their own set of hard economic, political, and moral trade-offs. There is also a sense of basic fairness in asking society’s very wealthiest individuals, all of whom just got a massive tax break, to hand over a small portion of their staggering fortunes in order to help society’s least well-off.
And yet, doing so would mean wagering the future of California’s tax base on the proposition that billionaires are bluffing when they threaten to leave the state. Progressives tend to be clear-eyed about the lengths the rich will go to avoid paying their fair share. They should recognize a risky bet when they see one.