California Democrats go full socialist in endorsing billionaire tax

The California Democratic Party has endorsed Proposition 40, the proposed billionaire wealth tax. The most interesting part of that decision, however, was not who supported it — but who opposed it.

Gov. Gavin Newsom declined to endorse the measure. Former US Health and Human Services Secretary Xavier Becerra opposed it. Major Democratic-aligned public sector unions, including the California Teachers Association and California Professional Firefighters, lined up against it as well.

According to reporting, Newsom and his allies even sought a compromise that would have replaced the ballot initiative with a less economically damaging alternative. 

Newsom wanted the measure off the ballot because it doesn’t play well for his Democratic presidential primary hopes. SEIU United Healthcare Workers West, which put the billionaire tax on the ballot, publicly offered to reduce the tax from 5% to 2%, which Newsom rejected. 

Newsom’s team instead offered roughly $7 billion in healthcare funding over several years. But the union sought much more extensive healthcare funding and, according to some reports, additional labor-related concessions. There was no deal, and so the voters will decide.

That should give Californians pause: This is not simply a disagreement between Republicans and Democrats over taxes. It is increasingly a disagreement within the Democratic Party over whether California can continue treating a remarkably small group of entrepreneurs and investors as an inexhaustible source of revenue.

Supporters argue that the wealth tax would affect only a few hundred billionaires while raising roughly $100 billion for healthcare and other public priorities. Those goals are understandable, particularly as California faces mounting budget pressures and uncertainty surrounding federal funding.

But good intentions are not enough. Tax policy should ultimately be judged by how people dynamically respond to it, and how economic behavior gets distorted — not merely by how much revenue it is projected to raise on paper if all else were the same and people didn’t follow their economic incentives.

California has already watched a remarkable number of entrepreneurs and businesses leave the state. Elon Musk moved to Texas. Larry Ellison and even Democrat-leaning Google co-founders Larry Page and Sergey Brin left for Florida. Oracle, Hewlett, Packard Enterprise and Charles Schwab all moved headquarters to Texas.

Whether taxes were the sole motivation in every case is beside the point. Successful individuals and businesses increasingly have options, and California is asking them to bear an ever-larger share of the state’s fiscal burden, while it is becoming easier for them to set up shop elsewhere.

That is why the debate over Proposition 40 cannot be reduced to a simple estimate of how much money it might collect.

My Hoover Institution colleagues, Joshua Rauh and Benjamin Jaros, have argued that there may be net negative revenue from the initiative. 

California’s wealthiest residents already generate enormous amounts of income tax revenue year after year. If a one-time wealth tax causes even a modest number of them to relocate (and it has), the state will lose them as taxpayers. The “net present value” of those losses may exceed the revenue generated by the tax itself. A policy advertised as raising money could ultimately leave California’s finances worse off.

That possibility helps explain why many Democrats have been uneasy about the initiative. Newsom has repeatedly warned that California’s tax base is already unusually concentrated among a small number of high-income taxpayers whose incomes fluctuate with financial markets. Increasing the state’s dependence on that same group does not solve the underlying problem, but rather makes it worse.

There is also a broader question about what message California wants to send. For generations, the state attracted entrepreneurs, investors, engineers and innovators from around the world. Silicon Valley became the global center of technological innovation because talented people believed California was the best place to build ambitious companies.

That competitive advantage should not be taken for granted. Other states actively compete for investment, headquarters and high-skilled workers.

The California Democratic Party’s endorsement of Proposition 40 suggests that too many of its leaders have come to see successful entrepreneurs primarily as a source of revenue rather than as the people who create the jobs, businesses and innovations that make California prosperous in the first place.

Even Newsom appears to understand the risk. Too bad his party does not.

Jon Hartley is a policy fellow at the Hoover Institution and an assistant professor of economics at the UT-Austin School of Civic Leadership.

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