California Governor Calls for Closing of Wealth Tax Loophole Known as "Buy, Borrow, Die"

California Governor Gavin Newsom has asked state legislators to close a tax loophole that allows wealthy investors to avoid capital-gains taxes by borrowing against appreciated assets and passing them to heirs at a stepped-up basis. The approach, informally called "buy, borrow, die," involves purchasing assets that increase in value, using them as collateral for loans that are not treated as taxable income, and then transferring the assets upon death, which resets the tax basis to current market value.

Newsom described the practice as a "tax-free lifestyle loan" available only to the richest Americans and called for federal action, warning that a state-level billionaire tax could prompt high-net-worth residents to relocate. > "The system America's founders built was designed to prevent the concentration of power in a few hands, but we have allowed that concentration to happen anyway," he wrote in a Substack post.

A recent analysis by the nonpartisan Tax Policy Center found that borrowing against assets accounts for just 1% to 2% of the economic income of the top 1% of U.S. households, suggesting the strategy is not widely employed. Adam Michel of the Cato Institute said the narrative that "billionaires exploit buy-borrow-die more than anyone else" is not well supported and described the issue as a "limited problem."

Law scholars at the University of Michigan and Yale noted that the dominant method for wealth accumulation among the ultra-rich is holding onto assets, allowing unrealized gains to compound without triggering taxes. They argued that raising ordinary and capital-gains rates would generate revenue without the constitutional challenges associated with a wealth tax.

Legislators in several states, including California, Massachusetts and Washington, are considering taxes on unrealized gains or high income for the wealthiest residents. At the federal level, Senator Elizabeth Warren has introduced a bill proposing a 2% annual tax on net worth above $50 million and an additional 1% levy on billionaires, along with a 40% exit tax for those who renounce U.S. citizenship. Estimates suggest the proposal could raise $6.2 trillion over ten years, though it faces legal and political hurdles.