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As cash-strapped US states look to plug holes in their budgets, plans to raise taxes on the super-wealthy are gaining support. The most prominent is California’s proposal for a “one-time” 5 per cent tax on the total wealth of residents with a net worth of $1bn or more, which could go to a ballot in November. Elsewhere, New York mayor Zohran Mamdani has threatened higher property taxes if state legislators do not approve his proposed levy on millionaires. Virginia, Washington and Rhode Island are also weighing raids on the rich. Targeting the well-heeled has political appeal, particularly given the soaring wealth of elites and the cost-of-living concerns of the rest of the population. But these measures will do more harm than good.
In America’s competitive federal model, the rich can quickly up sticks and take their business with them. This should give pause to states such as California and New York, where public finances depend on a narrow band of top taxpayers. Wealthy residents contribute revenue directly through income, capital gains and property taxes, and also through the profit, investment and jobs they generate. This is why Gavin Newsom, California’s Democratic governor, opposes the proposal on billionaires.
For measure, the top 0.1 per cent of earners in the Golden State contribute over a sixth of its income tax receipts. This concentration makes revenue acutely sensitive to migration and market swings. At least half a dozen billionaires reportedly left the state just ahead of the wealth tax’s proposed residency cut-off date of January 1 this year. These include Peter Thiel, David Sacks and Sergey Brin.
More could follow. The tax’s residency deadline date faces legal challenges and could be changed, granting others time to move. The wealthy, billionaires or otherwise, will also be aware that their conspicuous riches will continue to make them a target and that the proposal, if passed, sets a precedent for future tax grabs.
Lawmakers must also evaluate wealth levies with their state’s broader appeal in mind. Though California and New York retain strong advantages, given their talent and investor pools, no US state can rest on its laurels, particularly when others are actively trying to lure wealth creators. (Texas and Florida charge no personal income tax).
California, for instance, already leads the nation for the number of regulatory restrictions, and has among the highest tax rates and living costs. As such, over the past decade, it has haemorrhaged companies and talent to lower-tax, lighter-regulation states. Companies including Charles Schwab, Palantir and Tesla have shifted their headquarters elsewhere. In turn, between 2011 and 2021, California lost $102bn in net adjusted gross income to interstate migration, according to the National Taxpayers Union Foundation.
Rather than relying on wealth taxes, states should focus on improving competitiveness and fiscal resilience. In California, streamlining regulations and speeding up permitting would support growth, and future tax take. Tighter oversight of public spending would also reduce waste. California ranks among America’s highest spenders on welfare, education and health per capita, and is projected to run annual deficits exceeding $20bn until 2030.
There are more efficient ways of raising tax from billionaires: loopholes such as the stepped-up basis for inherited assets, which enables the wealthy to limit tax liabilities by borrowing against unrealised gains, warrant reform to ensure fairness.
Budgetary stability comes from broadening prosperity, not narrowing the numbers footing the bill. If the biggest contributors leave, others pay the price. In America’s borderless economy, states that toy with wealth taxes do so at their peril.
