California Spending Is Up 72% Since 2019 | Joshua Rauh

California's billionaire tax is already driving billionaires out

California's wealth tax is the opening round of a national argument about taxing wealth rather than income. Proposition 40 would take 5% of a billionaire's net worth once, and Rauh's objection is that the state's problem is spending, up 72% since 2019, while the tax would land on illiquid stakes in private companies. He expects the argument to move to Washington.

Takeaways

• California spending is up 72% since 2019. State spending in the current budget is up 72% since 2019, counting the general fund and all state activities. Rauh says the state has plenty of money but also large pension liabilities and other costs.
• Prop 40 taxes wealth above $1bn once. The measure would levy a one-time 5% tax on wealth over $1bn. Kalshi has put the odds near 25% to 30%, never above 50%. Governor Gavin Newsom and the California Teachers Association oppose it.
• Billionaires are leaving before it passes. Rauh says a number of billionaires have already left California, worried that a one-time levy would not stay one-time. His rule is that nothing is so permanent as a temporary tax.
• Wealth taxes fall on startup paper wealth. Rauh says the tax reaches intangible wealth, including an owner's implied share of a private company's post-money valuation. He argues the damage would spread well beyond billion-dollar unicorns to much smaller startups.
• Prop 40 may cost the state money. Supporters claim it would raise $100bn. Rauh's work with colleagues suggests it would lose the state money instead. He says loopholes should be closed, but the real question is where the money is going.
• California previews the national wealth tax fight. Rauh says this is the most watched state ballot proposition worldwide, with observers in Europe and France waiting to see whether the United States taxes wealth. He expects it to foreshadow the national debate.

How the tax hits a founder

1. A founder raises $5m at a $50m post-money valuation, so the state treats the owner's implied stake as $45m.
2. Proposition 40 would tax 5% of that implied stake, even though no shares were sold and no cash changed hands.
3. Warren and Ro Khanna have proposed thresholds of $50m or $100m rather than $1bn, catching founders much earlier.
4. Rauh says his Stanford students argue that billionaires, or anyone with $100m, can afford to pay more.

Other taxes on California ballots

• San Francisco's Proposition H would add a parcel tax on real estate to fund Muni.
• A regional measure would raise the sales tax for transit, especially BART, which has lost funding and ridership since COVID.