Experts project the wealth tax could ultimately cost California $24.7 billion more than it raises.
California’s billionaire tax is being sold to voters as a way to make the state’s wealthiest residents pay a fairer share, using most of the tax revenue for healthcare. Less understood are the assumptions behind Proposition 40 about how much billionaires already pay in taxes, how they manage their wealth, and how they will respond to a new 5% levy.
Once those estimates are corrected, experts project the wealth tax could ultimately cost California $24.7 billion more than it raises. My new report for the Independent Institute takes a closer look at the research behind the “2026 Billionaire Tax Act.”
Here’s what went wrong:
Start with a basic question: How much do billionaires pay in taxes? Emmanuel Saez and Gabriel Zucman, economists who helped write the billionaire tax proposal, estimated that the nation’s wealthiest households face comparatively low overall tax rates.
But economist David Splinter of the Joint Committee on Taxation reached a different result after adjusting their estimates for double-counted income and other data errors. For example, while Saez and Zucman estimated the nation’s 400 wealthiest households paid an overall tax rate of 24% between 2018 and 2020, Splinter’s corrected estimate was 38%. This is a 14-point difference in one of the central figures used to make the case that billionaires are undertaxed.
The same issue arises with another argument that the super wealthy can avoid income taxes by borrowing against their assets through a strategy known as “buy, borrow, die.” The idea is that rich people can fund their lifestyles by borrowing against appreciating assets instead of selling them and triggering capital gains taxes. When they die, their heirs inherit those assets at a stepped-up basis, eliminating taxes on unrealized gains. Recent research suggests the strategy is uncommon. New borrowing accounted for only 2.4 percent of total economic income for the top 0.01 percent of wealth holders in 2022.
In reality, the U.S. has a highly progressive tax system in which the top taxpayers pay a very high percentage of their income in tax.
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