California’s Potential Billionaire Tax Has Already Cost The State

California’s latest proposed tax increase has already led to so much wealth fleeing the state that tax revenue is set to fall, not rise. Golden State politicians announced the upcoming opening day of hunting season on billionaires and are about to find out they can’t fund welfare programs by taxing people who have already left.

At issue is California’s Proposition 40, a one-time 5% tax on billionaires’ net worth, which proponents claim will raise $100 billion for state-funded health care. Unfortunately for them, the wealthy were paying attention. At least seven high-profile billionaires left the state before Jan. 1 of this year, the residency date that determines who owes the tax.

They took with them roughly $539 billion of the state’s $1.9 trillion in billionaire wealth. Google co-founders Larry Page and Sergey Brin alone shrank the expected haul by $25 billion.

The fact is, $100 billion was never a realistic revenue projection. That estimate ignored losses from departures and legal challenges and both are certain to keep coming. The retroactive residency date alone invites a raft of constitutional challenges.

Supreme Court precedent bars retroactively imposing a “wholly new tax.” Locking people into paying whether they stay or leave, before voters have even approved the tax, burdens the constitutional right to travel. And as the Tax Foundation notes, uncapped penalties on appraisers of hard-to-value assets raise Excessive Fines Clause concerns, since they’re grossly disproportionate to good-faith errors.

Once departures and litigation are counted, Stanford economists Joshua Rauh and Benjamin Jaros estimate the tax would bring in closer to $30 billion. That’s less than one-third of what was promised, which is bad news for Medi-Cal, the state’s Medicaid program.

But the bigger problem has already arrived. While a wealth tax is collected once, an income tax is collected every year. Rauh and Jaros estimate California’s billionaires pay between $3.3 billion and $5.8 billion in state income tax annually, and every billionaire who relocates takes his share with him permanently.

Weigh that lost income tax revenue against Prop 40’s one-time haul, and the net present value of the tax comes out to negative $38.9 billion.

In other words, the tax is a money-loser for the state. And this estimate isn’t a mere outlier from unlikely assumptions: economists ran 100,000 simulations with different revenue estimates and discount rates, and the state came out behind in 85% of them.