California's billionaire tax: What's at risk for the biggest state economy in America

Voters in California will decide in November whether to impose a one-time, 5% tax on residents and trusts with a net worth of more than $1 billion. 

The proposal is deeply controversial, with opponents on both sides of the aisle warning that passage of the measure — the first of its kind in the U.S. — would be a body blow to the state's competitiveness. But one of the authors of the proposal insists California will be just fine. 

"California will, I think, more likely be better off if this is passed than not," said University of Missouri law professor David Gamage, who helped craft the proposal for the Service Employees International Union (SEIU), which led the drive to get it on the ballot. 

Gamage told CNBC the tax, which is supposed to make up for healthcare cuts in President Trump's so-called "Big Beautiful Bill," will 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 working for the people in California," he said. 

Why Gavin Newsom is against the wealth tax  

Even without the tax, California faces no shortage of competitive challenges. The state finishes at No. 17 overall in this year's CNBC America's Top States for Business rankings, dragged down by the nation's highest Cost of Living, the fifth-highest Cost of Doing Business, and the fourth-worst ranking for Business Friendliness, which measures the states' legal and regulatory regimes.  

The state ranks No. 29 for Quality of Life, in part due to health care — California ranks No. 48 in primary care providers per capita, according to the United Health Foundation. 

Democratic Gov. Gavin Newsom, who is eyeing a run for president in 2028, has vehemently opposed the wealth tax proposal, which he says will send businesses and their owners packing. 

"Wealth is movable, and it shops for the state with the lowest taxes," Newsom wrote in a Substack post last month arguing for a national wealth tax instead. 

A study of the proposal by the state's nonpartisan Legislative Analyst's Office late last year suggests the governor has a point. It says that the state would see a windfall at first. 

"The state probably would collect tens of billions of dollars from the wealth tax," the study says.  

But it says the payback would soon follow. 

"(I)t is likely that some billionaires decide to leave California. The income taxes they currently pay to the state would go away with their departure. The reduction in state revenues from these kinds of responses could be hundreds of millions of dollars or more per year." 

The Democratic nominee to replace the term-limited governor, former U.S. Health and Human Services Secretary Xavier Beccera, also opposes the tax, though primarily because of the way the measure is constructed. 

Republican nominee Steve Hilton, a former TV commentator, has said the tax would "destroy" the state by driving more wealth creators out. 

Norway's example shows mixed effects 

Gamage said the fears of an exodus are overblown, based on the experience in other places that have targeted the wealthy with taxes. 

"You see people sometimes leave, especially when they're getting close to retirement years. They've already cashed out of their business, they're somewhat retired, and they tend to move to Florida, sometimes Texas, sometimes Hawaii," he said.  

More important to competitiveness, he said, is creating an environment to build "the next wave of wealth." 

"You want a state where the education system makes it attractive for workers, where the healthcare system makes it attractive to be 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 did leave Norway, but it's relatively small compared to the revenue," he said. "The Norway wealth tax is raising a lot of revenue. Norway's economy is doing quite well." 

In fact, Norway's economy grew by just 1.1% last year, according to the World Bank, and growth was nearly flat in 2023, the year after the increases took effect. During that time, the wealthy were fleeing Norway.  

A report by the center-right Norwegian think tank Civita found that more wealthy Norwegians left the country in 2022 and 2023 than in the entire period between 2014 and 2021 — "an increase of 518%." 

In 2024, Norway closed loopholes around its 37.8% exit tax on those relocating, in an apparent attempt to stem the tide. 

Still, Norway is running a budget surplus — though it is shrinking — and income inequality is among the lowest in the industrialized world, according to the World Bank. 

"You can argue about whether it's been a little bit good or a little bit bad for Norway's economy," Gamage said. "There's no doubt that it's raising a lot of revenue and that it hasn't destroyed Norway's economy." 

Google founder Sergey Brin not leaving things to chance

California Congressman Ro Khanna, a staunch proponent of the tax who is considering his own run for president, posted on X in December that California's heritage of innovation will keep businesses and their leaders in the state regardless. 

"The idea that they would not start companies to make billions, or take advantage of an innovation cluster, if there is a 1-2 percent tax on their staggering wealth defies common sense and economic theory," he wrote. 

In fact, the proposal is for a one-time, 5% tax, not 1-2%. Taxpayers will have the option of paying it in five installments, but that carries an additional 7.5% deferral charge. 

In California, many are unwilling to leave the outcome to chance. 

Google co-founder Sergey Brin, who has already relocated his primary residence to Nevada in case the tax goes through, has poured tens of millions of dollars into "Building a Better California," a non-profit backing a ballot measure that would effectively neuter the wealth tax. 

Some labor groups also oppose the tax.  

"This policy will not provide the sustainable and long-lasting funding that our schools and communities deserve," wrote the California Teachers Association last month.  

But some California billionaires have no problem with the tax. 

Businessman Tom Steyer, who unsuccessfully ran for Governor in the June primary, campaigned on taxing "billionaires like me." 

Nvidia CEO Jensen Huang, who could face a nearly $8 billion tax bill if the measure passes, said in January he is "perfectly fine with it." 

Other states and municipalities will be watching closely, especially those who have already targeted tax measures toward the wealthy, like Washington and Massachusetts. New York City Mayor Zohran Mamdani has already pushed through a so-called "pied-a-terre tax" on expensive homes, and he has proposed a suite of other tax-the-rich measures to close the city's budget gap. 

California has long been a paradox in CNBC's competitiveness rankings — dominant when it comes to Technology and Innovation, and Access to Capital, but near the bottom when it comes to regulation and costs. That suggests wealthy entrepreneurs are willing to put up with some things to continue living and doing business in the state. Whether they will put up with a direct attack on their wealth remains to be seen.