The risks for biggest state economy in US
Voters in California will decide in November whether to impose a one-time 5% tax on residents and foundations with net worth over $1 billion.
offer It is an extremely controversial issue; Opponents on both sides of the aisle warn that passage of the measure, the first of its kind in the United States, would be a major blow to the state’s competitiveness. But one of the proposal’s authors insists California will do just fine.
“I think California would be better off if it passed than if it were not passed at all,” said David Gamage, a University of Missouri law professor who helped draft the proposal for the Service Employees International Union (SEIU), which spearheaded the proposal for a vote.
Gamage told CNBC that the tax, which is expected to offset cuts to health care under President Trump’s so-called “Big Beautiful Bill,” would help maintain California’s standard of living.
“Businesses thrive in places and states where people want to live, and being a place where people want to live requires health systems that work for people in California,” he said.
Why is Gavin Newsom against a wealth tax?
California does not face competitive challenges even without the tax. The state ranked 17th overall in this year’s CNBC America’s Best States for Business rankings, falling short of the nation’s highest Cost of Living, the fifth-highest Cost of Doing Business, and the fourth-worst ranking for Business Friendliness, which measures states’ legal and regulatory regimes.
The state ranks 29th in Quality of Life, due in part to its healthcare. According to the United Health Foundation, California ranks 48th in primary care providers per capita.
Democratic Gov. Gavin Newsom, who expects to run for president in 2028, has strongly opposed the wealth tax proposal, which he says would round out businesses and their owners.
“Wealth is portable and purchased from the government at the lowest taxes,” Newsom wrote in an op-ed. Substack post Last month we were discussing introducing a national wealth tax instead.
A. to work The proposal, filed late last year by the state’s nonpartisan Legislative Analyst’s Office, suggests the governor was right. He says that the state will gain an unexpected profit in the first place.
The study states that “the state will likely collect tens of billions of dollars from the wealth tax.”
But he says revenge will come soon.
“It is likely that some billionaires will decide to leave California. The income taxes they currently pay to the state will disappear with their departure. State revenues could be reduced by hundreds of millions of dollars or more annually due to such reactions.”
Former U.S. Health and Human Services Secretary Xavier Beccera, the Democrats’ candidate to replace the term-limited governor, also opposes the tax, primarily because of the way the measure was created.
Republican candidate Steve Hilton, a former TV commentator, said the tax would “destroy” the state by pushing out more wealth creators.
Norwegian example shows mixed effects
Gamage said immigration fears were exaggerated, based on experience in other places that target the wealthy with taxes.
“You see people leave sometimes, especially as they approach their retirement years. They’ve already cashed out their business, sort of retired, and they tend to move to Florida, sometimes to Texas, sometimes to Hawaii,” he said.
More important from a competitive standpoint, he said, is creating the environment to build the “next wave of wealth.”
“You want a state where the education system makes it attractive to workers, where the health care system makes it attractive as a place to live,” he said.
Gamage pointed to Norway, which has taxed wealth since 1892 but sharply increased the tax five years ago.
“Some people left Norway, but this is relatively small compared to the income,” he said. “The Norwegian wealth tax generates a lot of revenue. The Norwegian economy is doing pretty well.”
In fact, Norway’s economy grew by just 1.1% last year, according to the World Bank, with growth remaining nearly flat in 2023, the year the increases take effect. At that time, rich people were fleeing Norway.
A. report Center-right Norwegian think tank Civita found that more wealthy Norwegians are leaving the country in 2022 and 2023 than in the period between 2014 and 2021 — “an increase of 518 percent.”
Norway in 2024 closed spaces In an attempt to stem this trend, an exit tax of approximately 37.8% is imposed on those who relocate.
Still Norway runs a budget surplus is getting smaller – and income inequality is among the lowest in the industrialized world, according to the World Bank.
“You can debate whether this is somewhat good or somewhat bad for the Norwegian economy,” Gamage said. “There is no doubt that it generates a lot of revenue and does not destroy the Norwegian economy.”
Google founder Sergey Brin isn’t leaving things to chance
California Congressman Ro Khanna, a staunch tax advocate and considering running for president. Published on X He said in December that California’s legacy of innovation would keep businesses and their leaders in the state no matter what.
“The idea that they would not start companies or leverage an innovation cluster to make billions of dollars if a 1-2 percent tax were imposed on their staggering wealth defies common sense and economic theory,” he wrote.
In fact, the proposal is for a one-time 5 percent tax, not 1-2 percent. Taxpayers will have the option to pay off the debt in five installments, but this carries an additional deferral fee of 7.5%.
Many people in California do not want to leave the outcome to chance.
If the tax passes, Google co-founder Sergey Brin, who moved his primary residence to Nevada, will spend tens of millions of dollarsBuilding a Better California”, a nonprofit organization that supports a ballot measure that would effectively neutralize the wealth tax.
Some labor groups also oppose the tax.
“This policy will not provide the sustainable, long-term funding our schools and communities deserve,” he wrote California Teachers Association last month.
But some billionaires in California have no problem with the tax.
Businessman Tom Steyer, who ran unsuccessfully for Governor in the June primary, campaigned on taxing “billionaires like me.”
Nvidia CEO Jensen Huang, who could face a tax bill of nearly $8 billion if the measure passes, said in January that he was “completely happy with it.”
Other states and municipalities will be watching the situation closely, especially those like Washington and Massachusetts that have already targeted tax measures on the wealthy. New York City Mayor Zohran Mamdani has already introduced a so-called “terrea tax” on expensive homes and has proposed a number of other measures aimed at the wealthy to close the city’s budget deficit.
California has long been an oddity in CNBC’s competitiveness rankings; It dominates when it comes to Technology, Innovation and Access to Capital, but ranks at the bottom when it comes to regulation and costs. This shows that wealthy entrepreneurs are willing to put up with certain things to continue living and doing business in the state. Whether they will risk a direct attack on their wealth remains to be seen.
