California's Wealth Tax Revival Repeats a Failed Experiment

California legislators are again pushing a tax on accumulated wealth, and the sales pitch has not changed since the first version landed in Sacramento in 2020. Assembly Bill 2088, introduced by Rob Bonta before he became state Attorney General, proposed a 0.4 percent annual levy on net worth above $30 million. Its successor, AB 310 in 2021, went further: 1 percent above $50 million and 1.5 percent above $1 billion, with a projected haul north of $22 billion a year. The 2026 revival carries bigger numbers and the same arithmetic problem. Supporters say the state can collect more than $100 billion from its billionaire residents. Every country that has tried this has collected a fraction of the projection, then repealed the tax. Sweden did it. Colombia did it. France did it. The California version will not be the exception, and the reason is not political sabotage or accounting tricks. It is that the tax base is not a thing. It is a decision made by people who can decide otherwise.

The Arithmetic That Never Survives Contact

Static revenue estimates begin with a snapshot. Analysts take the Forbes list, count California residents, sum their net worth, and multiply by a rate. The 2021 estimate behind AB 310 worked roughly this way, and the current $100 billion figure appears to follow the same method with four more years of asset appreciation baked in. California has around 190 billionaires by most counts, with aggregate wealth in the neighborhood of $1.5 trillion, heavily concentrated in equity stakes in Nvidia, Alphabet, Meta, Tesla, and a long tail of private companies that have not had a liquidity event.

That last clause is where the model breaks. A 1.5 percent annual tax on an illiquid founder stake is not a tax on income. It is a demand for cash that the asset does not produce. The founder has three options: sell shares every year, borrow against them every year, or move. Selling triggers California's top marginal income tax rate of 13.3 percent on the capital gain, which means the wealth tax quietly forces a much larger income tax event as a side effect. Borrowing works until rates move against you. Moving works permanently.

Sweden ran this experiment for most of the twentieth century and abolished its wealth tax in 2007 under a center-right government, but the decisive evidence came earlier. The tax raised roughly 0.2 percent of GDP at its peak while the estimated capital flight ran into the hundreds of billions of kronor. Ingvar Kamprad, the founder of IKEA, left for Switzerland in 1973 and stayed away for four decades. Sweden did not lose a taxpayer. It lost a tax base, a set of corporate headquarters decisions, and the employment and secondary revenue that followed them. The Riksdag voted to repeal in September 2007 with support that crossed party lines, because by then the argument was not ideological. It was accounting.

Colombia offers the more recent case. Its wealth tax, restructured repeatedly and expanded under Gustavo Petro's 2022 reform to reach net worth above roughly 72,000 UVT, produced a documented behavioral response that Colombian tax authority microdata made unusually legible. Taxpayers bunched precisely at the exemption threshold. Reported wealth did not grow past the line. Not because people stopped accumulating, but because they stopped reporting, restructured holdings into exempt categories, or moved assets offshore. The elasticity estimates from that natural experiment are large enough to eat most of the projected revenue before enforcement costs are counted.

France is the clearest cautionary tale for a jurisdiction that thinks it is special. The impot de solidarite sur la fortune ran from 1982 and raised roughly 4 to 5 billion euros a year at its end. French economists estimated the cumulative capital flight at around 200 billion euros over three decades. Emmanuel Macron replaced it in 2018 with a narrow real estate levy, the IFI, and did so as a self-described centrist reformer, not as a supply-side ideologue.

The Exit Clause That Makes It Worse

The California proposals have consistently included a feature that should alarm anyone regardless of their view on redistribution: an exit tax. AB 2088 would have kept former residents on the hook on a declining schedule for up to ten years after they left the state, taxing a share of their worldwide net worth based on years of prior residency.

This is a constitutional problem and a signaling problem at once. The Commerce Clause and the Due Process Clause both constrain a state's ability to tax people and property with no current connection to it. Litigation is certain. But the more immediate effect is on the decision calendar of anyone considering a move. A ten-year tail does not make people stay. It makes them leave sooner, before the rules take effect, and it tells every founder currently deciding where to domicile a new company that California treats residency as a status it can claim retroactively.

That signal has already been priced. Between 2020 and 2023, California recorded net domestic out-migration in the hundreds of thousands per year. Charles Schwab moved its headquarters to Westlake, Texas. Oracle went to Austin, then Nashville. Tesla moved its corporate headquarters to Austin in 2021 and Elon Musk changed his personal residence to Texas in 2020, before the AB 310 vote. Palantir went to Denver. None of these moves were caused solely by a tax that never passed. All of them were made easier by a state that keeps floating one.

The Case For the Tax, Stated Fairly

The argument on the other side deserves a full hearing, because the strongest version is not the one that shows up in press releases.

Emmanuel Saez and Gabriel Zucman, the Berkeley economists whose work underpins most American wealth tax proposals, make a specific claim: existing income taxes fail to reach the returns to capital held by the very wealthy, because unrealized gains are never taxed, borrowing against appreciated assets is not a realization event, and the step-up in basis at death erases the liability permanently. The buy, borrow, die pattern is real. A founder can live on margin loans against appreciated stock for decades, pay interest instead of tax, and pass the assets to heirs at a stepped-up basis. This is not a loophole in a narrow sense. It is a structural feature of realization-based income taxation, and it is why effective tax rates on the top 400 households can fall below those of upper-middle-class wage earners in some estimates.

Saez and Zucman also argue that mobility responses are overstated, and they have a point about the difference between national and subnational taxes. Moving from Sweden to Switzerland is a different decision from moving from California to Nevada. A federal wealth tax paired with an expatriation regime faces less arbitrage pressure than a state tax with a four-hour drive as the escape route. Their proposed enforcement toolkit, third-party reporting on asset holdings, a strong exit tax, and formulaic valuation of private assets, is designed for exactly this objection.

Norway is the live test. It retains a net wealth tax, currently around 1 to 1.1 percent above a threshold near 1.7 million kroner, and it collects roughly 1 percent of total tax revenue from it. That is a functioning wealth tax. It is also, after Norway raised the rate in 2022, the tax that prompted a documented wave of departures to Switzerland, including Kjell Inge Rokke, one of the country's largest individual taxpayers. Norwegian researchers estimated the departures cost more revenue in lost income and dividend tax than the rate increase gained. A functioning wealth tax, in other words, functions at rates low enough that it does not raise the money California is promising.

Valuation Is the Enforcement Problem Nobody Solves

Set aside mobility. Assume every billionaire stays. The tax still has to be assessed, and assessment requires a number.

Public equity is easy. Everything else is not. What is a pre-IPO stake in a private AI company worth on December 31 when the last priced round was eighteen months ago and the secondary market is thin? What is a limited partnership interest in a venture fund worth when the fund's own marks are self-reported? What is a controlling stake in a family business worth when there is no market for a control block that nobody wants to sell?

Every answer to these questions is contestable, which means every answer is litigable. The Franchise Tax Board would need a valuation apparatus at a scale it has never operated, staffed with appraisers competing against the private valuation industry for talent. Taxpayers would hire better appraisers. Discounts for lack of marketability and lack of control, standard tools in estate tax practice, would be applied aggressively and defended in court for years. The administrative cost of European wealth taxes ran high relative to yield for precisely this reason, and it contributed to the repeals in Austria, Denmark, Germany, Finland, Iceland, and the Netherlands. Twelve OECD countries had net wealth taxes in 1990. Four have them now.

There is also the asymmetry that gets ignored. A wealth tax charges on paper gains that may reverse. A founder taxed at a $4 billion valuation in 2026 who watches the company mark down to $800 million in 2027 has paid real cash on wealth that never existed. There is no refund mechanism proposed. That is not a tax on wealth. It is a tax on optimism, collected at the peak.

The Bitcoin Question

Here is the part that changes the calculation from the twentieth-century versions, and California's drafters have not reckoned with it.

Sweden's wealth tax failed because Kamprad could move to Switzerland. That took a physical relocation, a corporate restructuring, and years of legal work. Bitcoin removes most of that friction. A twelve-word seed phrase is portable, self-custodied, and produces no third-party report to any tax authority. The entire enforcement architecture that Saez and Zucman propose depends on third-party reporting, and Bitcoin held in self-custody has no third party. Not because of a loophole to be closed, but because the asset is designed so that no intermediary exists to compel.

I do not think this is an argument for tax evasion, and I am not making one. I think it is an argument about what a wealth tax actually is. A tax on income is a claim on a transaction. A tax on wealth is a claim on existence, and enforcing it requires the state to know what you own, continuously, everywhere. That is a surveillance requirement before it is a fiscal one. The wealth tax and the case for hard, self-custodied money are two sides of the same argument, and the state made the case for Bitcoin by describing what it would need in order to collect. A monetary asset that cannot be inventoried by decree is not a tax dodge. It is the last practical check on a government that has decided your balance sheet is public property. California is about to discover that the check exists.

What to Watch

The wealth tax will not pass in its current form. Similar bills died in committee in 2020, 2021, 2022, and 2023 without floor votes, and the Assembly Revenue and Taxation Committee remains the choke point. Watch whether it clears committee at all. If it does not by the 2026 session deadline, the story is a messaging bill and nothing more.

If a version does pass, expect litigation filed within weeks, with the exit tax provision as the primary target under the Commerce Clause. Expect a preliminary injunction fight before the first assessment date. No revenue collected in year one.

Watch California's Legislative Analyst's Office rather than the sponsors' number. The LAO has consistently produced lower estimates than proponents on prior versions, and the gap between the $100 billion claim and the LAO's figure is the most informative number in this debate.

Watch the domicile filings. Every serious proposal generates a wave of residency changes in the six months before enactment, not after. Nevada, Texas, Florida, and Wyoming are the destinations. Puerto Rico's Act 60 is the aggressive option. The moves that matter will show up in Delaware corporate filings and county property records before they show up in tax receipts.

And watch the federal conversation. A state wealth tax is arbitrage. A federal one is a different animal, and it would face a constitutional question on direct taxation that the Sixteenth Amendment does not obviously resolve. The Supreme Court declined to settle that question in Moore v. United States in 2024, ruling narrowly and leaving the wealth tax issue open. Someone will force the issue this decade. When they do, the answer will determine whether the American version follows Norway's path or Sweden's.

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Source: Mises Institute