- California
Governor Gavin Newsom’s 2026-27 proposed California state budget of about $350 billion works out to nearly $27,000 per household and represents a 73 percent increase from the $201 billion budget he inherited when taking office in January 2019. Much of California’s state budget comes from an exceptionally narrow and volatile tax base: a small number of very high earners whose taxable incomes are tied to capital gains on stocks and business sales, and IPOs, much of which is within the tech sector.
The concentration of tax liability among the top earners is enormous. In recent years, the top 1 percent of California households provided roughly 40 percent to 50 percent of all personal income tax revenue. When equity prices are high and when IPO activity booms, California experiences a waterfall of revenue from these taxpayers. But when the stock market tanks, as it did during the financial crisis, the waterfall becomes a trickle, and the state experiences a budget crisis.
California’s fiscal situation was so bad at that time that the state government issued IOUs that promised annual interest of 3.75 percent, because the state’s general fund did not have adequate cash to pay their immediate liabilities.
The amount of taxes paid by the top earners is staggering. In 2021, when the stock market surged, those making $10 million and more—roughly the top 0.05 percent of taxpayers, about 8,500 taxpayers out of nearly eighteen million filings—paid more than $30 billion in state income taxes. The top 1 percent, roughly those who earned $1 million or more that year, paid more than $60 billion in personal income taxes. The income taxes paid by just California’s top 1 percent would have been sufficient to finance the entire state budgets of around thirty-eight states that year. The top 10 percent of taxpayers—those with incomes of at least $150,000—paid about 90 percent of tax revenue.
The enormous revenue generated by these taxpayers is a product of their earnings, plus a top personal income tax rate of 13.3 percent—the highest in the country—which can rise to as high as 14.4 percent on wage income. The Tax Foundation, a nonpartisan research organization studying taxes and fiscal policy within the country, ranks California as number forty-eight among the states in tax competitiveness.
California’s dependency on the very top earners is extremely risky because of the volatility of the stock market. Revenue swings include a 55 percent increase in personal income tax revenue in 2021, followed by a nearly 35 percent drop in 2023. In the past thirty-five years, the standard deviation of the percentage change in personal income tax revenue is about 17 percent.
This is not a stable fiscal structure. California has effectively tethered its operating budget to the roller coaster of Silicon Valley equity markets and IPO transactions.
This dependency helps explain why the proposed California “Billionaire Tax Act,” which will be on California’s November ballot, is one of the most contentious fiscal debates in the state’s modern history. The proposed initiative would impose a one-time 5 percent tax on California residents with net worth exceeding $1 billion. But the proposal raises significant economic and practical questions. Wealth taxes are fundamentally different from income taxes. California already taxes realized capital gains as ordinary income. A wealth tax, by contrast, attempts to tax unrealized paper gains. A founder of a company whose wealth consists largely of company shares could face enormous tax liabilities despite limited cash flow.
The design of the tax could also produce effective rates well above the advertised 5 percent because of some whose voting rights may far exceed their ownership share. For example, a founder with super-voting shares, which may give the shareholder 10-to-1 voting rights, could be valued at a substantial premium over shares that do not have this right. For example, if the tax authority values a founder’s super-voting shares at a 30 percent premium, then the tax rate rises to 6.5 percent.
For many reasons, it is essential that California keep the most remarkable business creators within the state. But some are leaving in anticipation of a wealth tax and taking their incomes—and their income tax payments—with them. Those who relocated around January 1, 2026, the cutoff date for exemption from the wealth tax, include Larry Page and Sergey Brin (cofounders of Google), Peter Thiel (PayPal and Palantir), Travis Kalanick (Uber), and Steven Spielberg (director of Jaws, Raiders of the Lost Ark, Jurassic Park, and other films). These departures follow the relocations of Elon Musk (Tesla, SpaceX), Larry Ellison (Oracle), and Charles Schwab in recent years.
These moves are entirely predictable because wealthy individuals can maintain homes in multiple locations, including establishing residency in a state with no income taxes, while continuing to spend significant time in California. For example, Musk and Kalanick are in Texas. Schwab, Thiel, Brin, and Page are in Florida. Neither Texas nor Florida has a state income tax. And if California voters do pass the wealth tax in November, it will certainly be litigated over potentially a wide range of constitutional issues. And during this litigation, expect more of California’s most successful creators to leave, taking their incomes with them.
The problem becomes even more complicated at the local level. California’s largest cities and counties have increasingly pursued their own targeted taxes on businesses and high earners. San Francisco is perhaps the clearest example. The city already imposes a gross receipts tax on businesses operating within the city. It also adopted the “Overpaid Executive Gross Receipts Tax,” which imposes additional taxes on companies whose executives earn more than one hundred times the pay of their median workers.
The “Overpaid Executive” tax was marketed to voters nearly six years ago to fund the homelessness and drug-abuse problems that have been plaguing San Francisco for years. But the proceeds flowed into the general fund, rather than any account directed specifically for the advertised uses.
Now San Francisco voters are considering Measure D, a measure that would further increase taxes on companies with large executive-to-worker pay disparities and be used to fund—you guessed it—mental health services, emergency medical care, and public hospitals, all of which are implicitly aimed at the homeless. If passed, this would further weaken a downtown economy already dealing with office vacancies, remote work, retail closures, and population decline.
San Francisco voters are playing with fire when it comes to Measure D, as San Francisco’s downtown area struggles with commercial building values falling as much as 75 percent from valuations a few years earlier, along with several businesses having left the city already, including X (Twitter) and Charles Schwab. Moreover, San Francisco already has the highest municipal budget in the country, spending nearly $20,000 per person, compared to New York, which has a budget of about $14,000 per person. The city’s own study estimates costs that include job loss of 950 and a GDP loss exceeding $200 million over two decades.
The chronic demand for more taxes is visible across other parts of California. Los Angeles implemented a “mansion tax” under Measure ULA, imposing an additional 4 percent transfer tax on properties between $5.3 and $10.6 million, and an additional 5.5 percent on properties over $10.6 million, including apartment buildings. Supporters promised large revenues for homelessness programs and affordable housing. Instead, property sales in these price points collapsed after enactment. The Cato Institute found that overall tax revenue from these properties may have declined by as much as 38 percent after implementation, and a UCLA study found that the likelihood of a property selling within the affected range may have declined by as much as 50 percent.
California doesn’t have a revenue problem. It has a spending problem, reflecting programs that are too expensive, that have inadequate oversight and accountability, and which sometimes fail, ranging from California’s 9-1-1 system overhaul, which may have cost as much as $500 million, and now must start over, to high-speed rail, which is grossly over budget and delayed by decades.
Put differently, as a Californian, can you feel any benefits of a state budget that has increased about 40 percent (after adjusting for inflation) over the past eight years? Do San Franciscans believe they are receiving nearly $20,000 per person—$46,000 per household—in municipal services annually?
Those levels of spending are possible only because California has a handful of extraordinarily successful individuals. But if many more of these individuals leave, or when the NASDAQ—which has increased by about a factor of five in the past ten years—ultimately tanks, California finances will suffer and the state will face yet another budget crisis, and almost certainly, proposals for even more taxes demanded of the most successful Californians. But by that time, will California have killed its golden geese—the top 1 percent—who kept the state afloat for so many years?
