California lawmakers have revived a controversial wealth tax proposal targeting the state’s ultra-wealthy residents, potentially creating the nation’s first true wealth tax at the state level. The legislation, introduced earlier this month by Assemblymember Alex Lee, would impose a 1.5% annual tax on worldwide net worth above $1 billion starting in 2026, with plans to expand to assets above $50 million at a 1% rate by 2028.
The proposal emerges amid growing concerns about wealth inequality and as California faces a projected $38 billion budget deficit. According to the latest estimates from the state’s Franchise Tax Board, the tax could generate approximately $21.6 billion annually once fully implemented—revenue desperately needed as the state struggles with fiscal challenges.
“This is about asking the ultra-wealthy to pay their fair share,” Lee stated when introducing the bill. The progressive Democrat from San Jose has attempted similar legislation twice before, though previous efforts failed to gain sufficient traction. This time, however, the proposal comes with significant modifications designed to address earlier criticisms.
The California Taxpayers Association remains firmly opposed. “This proposal is fundamentally flawed and would likely accelerate the exodus of wealth from California,” said Peter Warren, the association’s president. “We’ve already seen significant migration of high-net-worth individuals to states like Texas, Florida, and Nevada.”
Indeed, the proposal arrives at a precarious moment. According to data from the U.S. Census Bureau, California experienced a net domestic migration loss of approximately 341,000 residents between 2021 and 2022 alone, many citing the state’s high tax burden as a primary motivation for relocation.
The wealth tax would function fundamentally differently from income taxes. Rather than targeting earnings, it would tax the total value of assets—including difficult-to-value holdings like private business interests, real estate, and investments—regardless of whether those assets generated any income or were sold during the tax year.
“The implementation challenges are enormous,” explains Stanford economist Katherine Daniels. “Valuing illiquid assets annually creates significant administrative complexity and potential legal battles over valuations.” Daniels points to European experiences with wealth taxes, where many countries eventually abandoned similar policies due to administrative burdens and capital flight.
The bill contains provisions to capture taxes from those who leave the state, requiring former residents to pay a proportional amount of the wealth tax for up to four years after departing California. This “exit tax” component has raised serious constitutional questions among legal scholars.
“The attempt to tax non-residents based on prior residency likely violates several constitutional principles,” notes Jonathan Williams, tax attorney and constitutional law expert. “It potentially infringes on the Commerce Clause by inhibiting free movement between states, and may violate due process requirements for state taxation jurisdiction.”
California’s proposal reflects a growing national debate about wealth taxation. While the Biden administration proposed a “billionaire minimum tax” in its 2023 budget, the measure failed to advance in Congress. Progressive Democrats like Senators Elizabeth Warren and Bernie Sanders have long advocated for federal wealth taxes, arguing that the current tax system allows enormous wealth to remain largely untaxed if held rather than sold or distributed as income.
The Federal Reserve’s Survey of Consumer Finances reveals why wealth taxation has gained popularity among progressives: The wealthiest 1% of Americans control approximately 38% of the country’s wealth, while the bottom 50% hold just 2%. This disparity has widened substantially over recent decades.
California’s extraordinary concentration of wealth makes it a natural testing ground for such policies. The state is home to 186 billionaires according to Forbes’ 2023 list, including some of the world’s richest individuals. Tesla CEO Elon Musk, who relocated to Texas in 2020, cited California’s high taxes as a factor in his decision.
The flight of billionaires poses a significant risk to California’s revenue base. A 2021 analysis by the state’s Franchise Tax Board found that the top 1% of California income earners generated nearly 50% of the state’s personal income tax revenue. Even a modest exodus of ultra-wealthy residents could dramatically impact state finances.
Business groups have mobilized against the proposal. The California Chamber of Commerce labeled the bill a “job killer,” arguing it would drive away entrepreneurs and investors critical to the state’s innovation economy.
“Silicon Valley’s success depends on risk-takers who build companies with the expectation of substantial rewards,” says Michael Richardson, venture capitalist and former tech executive. “This tax fundamentally changes that calculation and sends a hostile message to entrepreneurs considering where to launch their next venture.”
Proponents counter that California’s unique advantages—including top universities, established tech ecosystems, and desirable climate—will retain most wealthy residents despite higher taxation. “The evidence suggests that moderate tax increases don’t cause mass migration,” argues Emmanuel Saez, economist at UC Berkeley who has advised Warren on wealth tax proposals. “Family ties, business connections, and quality of life factors often outweigh tax considerations.”
As the legislative battle heats up, both sides are marshaling evidence from international experiences. Norway, Switzerland, and Spain maintain wealth taxes today, while France, Germany, and Sweden abandoned similar schemes, citing capital flight and administrative difficulties.
The constitutional path forward remains uncertain. Even if passed by California’s legislature, the proposal would face significant legal challenges that could delay implementation for years. The U.S. Supreme Court has historically shown skepticism toward state taxes that might impede interstate commerce or extend beyond traditional jurisdictional boundaries.
For California’s fiscal planners, the stakes couldn’t be higher. With growing budget pressures and an increasingly mobile tax base, the state faces difficult choices about how to fund its ambitious social programs and infrastructure needs. The wealth tax debate reflects these broader tensions in American federalism—whether states can effectively tax highly mobile capital in an era when wealthy individuals can change residency with relative ease.
As this legislative battle unfolds in Sacramento, the entire nation will be watching. California’s experiment could either spark a revolution in state taxation or serve as a cautionary tale about the limits of wealth taxation in our federal system. Either way, the outcome will reverberate far beyond the Golden State’s borders.
