A proposed "wealth tax" on California's billionaires could backfire and cost the state tens of billions of dollars in the long run.

If the proposed tax drives wealthier residents out of the state, California could end up losing between $1 billion and $3.5 billion annually in income taxes, according to a working paper published this week. A pair of researchers at Stanford University warn that the state could end up losing an estimated $39 billion because of the consequences of the wealth tax.

"These findings suggest that the Billionaire Tax Act will not fulfill the primary functions for which it was designed," write researchers Benjamin Jaros and Joshua Rauh.

Voters in California will decide next month whether to impose the one-time, 5 percent tax when they vote on Proposition 40. The ballot measure is dividing Democrats—Gov. Gavin Newsom opposes it, while progressive Rep. Ro Khanna (D–Calif.) claims it is the "most important ballot initiative in America and a fight for the soul of our party."

And it's already spurring some billionaires to flee the state—including venture capitalist Peter Thiel and Google co-founder Larry Page. Including those two, the seven billionaires who have publicly said they are leaving the state represent more than $539 billion of the nearly $1.9 trillion aggregate net worth of California's billionaires, the researchers note.

With other departures likely happening more quietly, the new study estimates that the tax will generate about $30 billion, a far cry from the $100 billion that the tax's supporters expect. The "behavioral response" from billionaires in California "has eroded most of the projected tax base," write Jaros and Rauh.

That's still a pretty big pot of revenue. In the long run, however, the state is likely to lose out.

After running 100,000 simulations using different assumptions, the two researchers report that "85 percent of plausible outcomes produce a negative" result in state revenue.

Other recent experiments with special taxes on wealth have backfired in similar ways. In response to a new wealth tax in Washington State, Jeff Bezos relocated to Florida, and iconic Seattle brand Starbucks shifted more of its corporate headquarters to Tennessee. Studies have shown that a "millionaires tax" in Massachusetts contributed to wealth moving out of that state.

Capital is always mobile, despite the best efforts of politicians. And if you were a billionaire living in California, why would you stick around?

Polls show voters are narrowly divided over Proposition 40. A Politico poll published earlier this month showed 46 percent of voters plan to vote for the measure, while 43 percent oppose it. Voters were similarly divided when asked if they expected it to pass or not.

The post California's 'Wealth Tax' Could Cost the State $39 Billion appeared first on Reason Magazine.

My recent trip to Malibu from Los Angeles was my first post-wildfire drive through the Pacific Palisades and, my goodness, there's nothing like seeing something with one's own eyes to grasp the enormity of the devastation. The obliterated hulks along Pacific Coast Highway 21 months after the tragedy raise multiple issues, including ones related to the excruciatingly slow rebuilding process.

This being California, the state has yet to grapple sufficiently with the reasons the wildfires started—and the failed response to them. But late is better than never, so I applaud a new report that Gov. Gavin Newsom commissioned from the nonprofit Fire Safety Research Institute. Released this month, it looked at the nitty-gritty of how the fires started and how multiple agencies reacted. The results aren't pretty.

The New York Times provided the best summary: "The comprehensive analysis found that while several state and local agencies fell fatally short in their preparation and response, the clearest lesson from the disaster was the extent to which climate-driven fires are outstripping modern firefighting." The report found LA officials failed to take the fires seriously enough at the outset. County officials handled the Altadena evacuations in a "chaotic" manner. They were unprepared for the intensity of the fire storms.

We've all read about some of the inexplicable stupidity. The Santa Ynez Reservoir was empty during the fires because of a repair to its protective cover, yet it's empty again (although it's in the process of being refilled). The California Coastal Commission allegedly delayed new permits for the Los Angeles Department of Water and Power to install fire-resistant utility poles because of concerns about an endangered weed. The commission disputes that report—and there's still heated debate involving multiple agencies.

If we can't get multiple agencies on the same page on one minor question about milkvetch, I'm skeptical California can deal with the basics. The report said the tragedy involved "multiple interlinked systems rather than any single factor or failure." In one example by Patch, the Los Angeles County Sheriff's Department remained at normal staffing levels. The Los Angeles Fire Department was reportedly so concerned about overtime costs that it reportedly responded slowly.

This epitomizes California's approach to everything: Bigger agencies, higher spending, and expanded workforces. The left hand never knows what the right hand is doing. Other priorities outside of public protection—budgeting, meeting union demands, turf battles—take precedence. This isn't malicious, but reflects the fundamental nature of government.

Even after the state suspended rebuilding regulations, the rebuilding process is still in a quagmire because of the number of involved agencies. How could California realistically streamline a wildfire-fighting process that involves an alphabet soup of local, county, regional, and state bureaucracies? Even the feds are involved because around 45 percent of the state's land area is owned by them. The wildfire issue is a statewide problem, so the conclusions should resonate beyond LA.

Furthermore, the report argues that California needs to change its overall approach toward wildfire resilience. Back to the Times analysis, which noted that climate-driven fires are becoming more intense and that's challenging the traditional ways that the state has battled wildfires. But how often have you seen governments respond efficiently to external economic or environmental changes? All governments are slow-moving freight trains.

Everything government does is mired in the past. As an unrelated example, the nation's education system isn't much different than the one created in the 1800s—despite all the technological changes that should have sparked a revolution. When COVID hit, private schools adapted and provided successful at-home learning, whereas the public schools watched students fall behind and truancy rates soar. It's not any different with any public service, including firefighting.

My fear: California policymakers will read that summary about "climate-driven" fire risks and do what they always do: blame the problem on climate change and double down on the state's counterproductive climate policies. They are designed to change the entire Earth's weather patterns (even though California is responsible for less than 1% of the world's greenhouse emissions), rather than adjust our regulatory system to make us more resilient in the face of warming trends.

California's union-controlled state and local governments aren't about to adjust firefighting budgets so they can further stretch their dollars. State firefighters generally earn more than $250,000 in annual total compensation, with some Los Angeles firefighting officials earning pay levels that boggle the mind. Instead of trimming costs, California has been ratcheting up pay levels.

California state officials haven't even been forthright about their approach toward brush clearance. For instance, four years ago Newsom touted an important wildfire-prevention program that at the time hadn't completed a single project. We hear promises, but little action.

That's government for you. It doesn't do anything well and is incapable of learning the right lessons even from the best reports. Driving along PCH was just my latest reminder of this sad truth.

This column was first published in The Orange County Register.

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The federal government just closed fiscal year 2026 with a deficit of nearly $2 trillion, according to figures the Congressional Budget Office (CBO) released last Thursday. Only the two pandemic years of 2020 and 2021 were worse. Today, though, there is no recession and no emergency. These enormous budget deficits are the new normal.

The usual response to a deficit warning is that the government just needs more money. It doesn't. Thanks to the remarkable strength of the private sector, federal revenue rose by 3 percent, to more than $5.4 trillion, over the fiscal year. But spending rose by 6 percent, reaching $7.4 trillion.

Some will blame the Supreme Court for striking down most of President Donald Trump's tariffs and forcing the government to issue refunds. But even if Washington had kept the $130 billion in illegal levies, it would cover less than one-tenth of the gap. Tariffs were never a serious revenue source at our insanely high level of spending.

Look at where the money went. Spending on the three main entitlement programs—Social Security, Medicare and Medicaid—grew by 7 percent. That's faster than total spending growth. Defense grew by 5 percent. Interest on the debt rose by 11 percent, exceeding $1.1 trillion. That last figure is the bill for every earlier year of borrowing—years when Washington was sending clear signals that it isn't serious about fiscal responsibility.

If you want to see where such irresponsibility can lead, look at France. The country that big spenders from Paul Krugman to Sen. Bernie Sanders (I–Vt.) have cited as proof that big government is viable and full of upsides is now on the brink of a serious crisis. France's debt equals 120 percent of its gross domestic product (GDP), and interest payments are rising quickly. Slow growth and social unrest aren't helping.

The U.S., of course, has some advantages that France doesn't, largely because we're a country of innovators with a private sector unmatched at creating wealth. Nonetheless, debt that is swelling out of control should still worry us. First, the same anti-wealth and anti-growth forces that brought France to where it is now are gaining popularity here. Second, we too will see debt reach 120 percent of GDP in a few years, and our interest payments are already consuming an alarming share of resources.

A wise Congress would put us on safer footing if only because debt raises interest rates for everyone, from homebuyers to small businesses. This operates as a drag on growth, and hence on wages. In other words, controlling debt should be part of an affordability agenda in the same way as streamlining regulation.

When legislators decide to take affordability seriously, I recommend looking at a September Advancing American Freedom (AAF) report on this topic. Its section on fiscal restraint offers a useful menu of reforms, including targeting the programs that most drive the debt.

Start with Social Security. Under current law, benefits will be cut by roughly 20 percent when the program's trust fund runs dry in the early 2030s. Nobody believes Congress will actually let that happen, but we'd better hope its answer isn't to double down by borrowing the difference between payroll taxes and benefits.

Nor are tax increases an option. The payroll tax meant to fund entitlements is now 12.4 percent of wages. It began at 2 percent when Social Security was first rolled out. It is also the most burdensome tax for many Americans. Enough already. The fixes AAF fellow Rachel Greszler proposes are worth considering: Index the retirement age to life expectancy, use an accurate inflation measure for cost-of-living adjustments, and move gradually toward a flat universal benefit that protects lower-income retirees while ending Social Security's de facto welfare for the wealthiest.

Next is Medicare. More than 40 percent of its financing already comes from general revenue rather than from payroll taxes. The report recommends converting the program to premium support, giving beneficiaries a fixed contribution to spend on traditional Medicare or on competing private plans. It would also raise the eligibility age to 67, matching Social Security, and trim subsidies for well-off seniors. That's a start.

As for Medicaid, the problem is one of pricing. And yet competition based on price—the best cost-control tool—has never been seriously tried. Washington covers 90 percent of the cost of states' expanded Medicaid programs for adults. A state can buy a dollar of spending with just a dime of its own money. Changing the states' incentives would be key here. Implementing risk-adjusted per-capita caps, through which the federal government would give states a fixed amount per enrollee, would do just that. States would pay for their own inefficiencies or would be able to use every dollar they save by becoming more efficient.

The same logic supports returning more welfare programs to states, starting with the federal share of the Supplemental Nutrition Assistance Program. State governments have to balance their budgets in some form.

None of these reforms are painless. But the alternatives will prove far more painful. The U.S. will either continue paying a slow, unlegislated tax called inflation or face a fast, ugly fiscal crisis when bond buyers stop giving Washington the benefit of the doubt.

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A California state auditor found waste, mismanagement, and misuse of taxpayer money inside several state agencies, including the office of state Controller Malia Cohen, which is responsible for managing state finances and payroll. The investigation found that for over a year, senior officials in Cohen's office deliberately stalled the recovery of more than $33,000 in salary overpayments to two employees, canceling a required payroll deduction while considering an alternative plan to seek state payments on the employees' behalf. Officials never carried out that plan, and the auditor concluded that the office violated state law by failing to collect one employee's debt. The investigation also found that two managers worked remotely from Idaho, Tennessee, and Alabama despite rules restricting out-of-state telework. Across nine cases involving multiple state agencies, the auditor identified about $885,000 in wasted, misused, uncollected, or improperly spent public funds.

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