California weighs historic billionaire wealth tax as economists clash over revenue impact

California voters are deciding on Proposition 40, a one-time 5% tax on the net worth of residents who are billionaires as of Jan. 1, 2026. The measure would direct most of the revenue to health care for low-income residents and is designed to apply retroactively, aiming to limit tax-avoidance through relocation.

Economist Gabriel Zucman, who helped craft national wealth-tax proposals, argues the tax could generate about $100 billion for the state, after accounting for a 10% reduction for avoidance and evasion. He says the tax would address the disparity between rapidly growing billionaire wealth—estimated at $2.3 trillion by mid-2026—and relatively modest income-tax contributions.

"If California says, 'We can tax billionaires. We can tax the wealthiest, most powerful people in the world,' it will be the beginning of not only a broader U.S.-wide movement, ultimately paving the way for a federal wealth tax — but I think it will be the beginning of an international movement," Zucman told Planet Money.

Stanford economist Joshua Rauh, co-author of a competing analysis, contends the tax could cost the state up to $39 billion. He estimates that departures by several high-profile billionaires and legal challenges would reduce revenue, projecting a net loss of $30-$39 billion after accounting for potential income-tax losses.

"It would not raise $100 billion for the state," Rauh said. "We calculate that Proposition 40 would cost the state of California $39 billion."

Both sides note the uncertainty surrounding billionaire residency and the likelihood of constitutional challenges, especially to the retroactive provision. Proponents point to safeguards such as taxing business holdings and allowing deferrals for illiquid assets, while critics argue these measures may be insufficient to prevent capital flight.

The debate reflects broader concerns about the effectiveness of wealth taxes, with past examples cited as having limited success due to loopholes and migration of the rich. Supporters cite Norway’s long-standing wealth tax as a model where revenue gains outweighed modest out-migration, whereas opponents warn that California’s tech ecosystem may not retain billionaires if the tax is perceived as hostile.

Tech leaders have offered mixed reactions. Nvidia CEO Jensen Huang said he is "perfectly fine" with paying the tax, while other billionaires have reportedly spent hundreds of millions to oppose the measure. The outcome of the vote could influence tax policy debates nationwide and potentially shape future federal proposals.