California Wealth Tax Impact LAO says: "very hard to predict"
What the LAO Actually Said (and What It Didn't)
The California Legislative Analyst's Office is the state's nonpartisan fiscal watchdog, and its December 2025 analysis is remarkably candid about its own limitations. The LAO found the exact amount the state would collect is very hard to predict for many reasons — it's hard to know what actions billionaires would take to reduce the amount of tax they pay, and much of the wealth is based on stock prices which are always changing. The LAO further acknowledged it is "likely" that some billionaires decide to leave California, and that the income taxes they currently pay to the state would go away with their departure. CA
That last phrase — "would go away with their departure" — is the crux of the problem that no one is adequately modeling. The LAO projected "hundreds of millions of dollars or more per year" in lost income tax revenue, but the phrase "or more" is doing considerable work in that sentence. Orange County Register Stanford's Hoover Institution analyzed the LAO report and concluded it substantially understates the compound exposure.
The Tax Concentration Problem Nobody Is Squarely Addressing
Here's the structural fact that makes California's situation uniquely dangerous and which the proponents' modeling almost entirely ignores. The top 0.7% of California taxpayers — those earning over $1 million annually — currently pay 35.7% of all state income taxes. Ultra-high earners with over $10 million in annual income — just 5,232 individuals — contribute nearly 13% of total income tax collections, approximately $19 billion annually. Orange County Register
The California Chamber of Commerce has documented that in 2019, the top 1% of income earners paid almost 45% of all personal income taxes. California Chamber of Commerce And the LAO's own historical blog has flagged this repeatedly: the share of California's personal income tax paid from the 1% of PIT returns with the most income is highly volatile, driven by rises and falls in stock and other asset prices. CA
So California already runs a tax system that is structurally dependent on a tiny number of people whose income is itself volatile. The billionaire tax would not be adding a new risk — it would be accelerating an existing structural vulnerability while simultaneously triggering the behavioral responses that make that vulnerability worse.
The Pro-Tax Model: Berkeley/Saez — What It Gets Right and Wrong
The most rigorous defense of the tax comes from Emmanuel Saez at Berkeley, co-authored with law professors Galle, Gamage, and Shanske. Their scoring: 204 California billionaires hold a collective wealth of $2.19 trillion. A 5% tax raises $109.5 billion. Factoring in 10% for tax avoidance and evasion leads to a net estimate of approximately $100 billion, spread over 2027–2031. Berkeley
Their model makes several bold assumptions that deserve scrutiny:
First, they assume minimal migration because of California's network effects and agglomeration advantages. They argue that just as California consumers for these businesses are relatively immobile, the agglomerations of expertise, capital, and amenities that make California a great place to work are also relatively immobile. Berkeley This is defensible for a company's operations — Tesla still pays California corporate income tax proportional to its California sales regardless of where Musk lives — but it is not defensible for personal income tax, which follows the individual, not the company.
Second, they discount the "one-time tax becomes permanent" risk by pointing to the initiative's structure. But the "one-time" label offers no credible commitment, and billionaires know it. They make decisions based on policy trajectories, not political promises. Once California establishes the principle of taxing accumulated wealth, the die is cast. Theunseenandtheunsaid Wealthy individuals with teams of lawyers and planners plan for scenarios, not promises.
Third — and most critically — the Saez model uses a blanket 10% avoidance/evasion discount when the behavioral response for this specific population is likely to be far more aggressive and sophisticated. These are people who pay Goldman Sachs and Wachtell Lipton to do nothing else but find them options.
The Anti-Tax Model: Hoover/Stanford — What It Gets Right and Wrong
The Stanford Hoover Institution analysis, published in the OC Register, is the most comprehensive critique. It correctly identifies the compound threat: the wealth tax targets California's few hundred billionaires, many of whom are also in the highest-annual-income group. So when the LAO notes that some billionaires are "likely" to leave, they're not just describing a loss of one-time wealth tax collections, but a permanent loss of substantial, recurring annual income-tax revenue. Orange County Register
They also cite their own prior research on migration dynamics: post-Proposition 30 migration patterns show high earners increasingly choosing zero-income-tax states like Texas, Nevada, and Florida. During the Tax Cuts and Jobs Act period, $4 billion in taxable income left California as the SALT deduction cap bit; during COVID, that figure reached $11 billion. Orange County Register
Where the Hoover analysis is weakest is that it doesn't fully grapple with how the retroactivity provision changes the calculus. If the tax is legally locked to January 1, 2026 residency, the migration window may already be partially closed for many of these billionaires, which is precisely what the initiative's drafters intended.
The Liquidity Problem: Almost Nobody Is Modeling This Correctly
Much billionaire wealth exists in illiquid or semi-liquid form. Paying a 5% levy will often require selling equity or borrowing against assets. If assets are sold, capital gains taxes apply on top of the wealth tax. If prices later decline, no adjustment is made. Gains are taxed when convenient for the state, while losses are ignored. Theunseenandtheunsaid
This asymmetry is a genuine modeling gap. Consider a hypothetical founder who holds $10 billion in a private company that generates $50M in annual cash income. The wealth tax is $500M. To pay it, they either: (a) take the company public or sell equity, which itself generates a taxable event at California's 13.3% capital gains rate on top of the wealth tax; (b) borrow against the holding at 5–6% interest, paying $25–30M per year just in carrying costs; or (c) restructure the holding outside California through a trust or entity change, which takes time and is exactly what Baker Botts, Wachtell, and Davis Polk are billing $1,500/hour to advise on right now.
The measure includes penalties of 20–40% for underreporting or undervaluing assets, creating substantial enforcement and litigation risks. Abitos The valuation disputes alone — over private company stakes, art, intellectual property, and other illiquid holdings — will generate years of litigation that further clouds the revenue picture.
What a Complete Model Would Need to Include (That Nobody Has Built)
The modeling gap you've identified has several specific components that remain unaddressed in the public literature:
1. Second-order income tax loss, not just the direct wealth tax. The state's income tax is already the most volatile revenue source it has. Losing even 10–15 of the ~200 billionaires means losing their annual income tax payments permanently. At average annual income tax payments in the many tens of millions per person, the permanent annual loss could approach or exceed the annualized wealth tax gain within a decade.
2. Capital formation and startup ecosystem effects. Incalculable is the number of businesses that will never be founded in California, or individuals and businesses moving out of the state, because of this. This will have a chilling effect on California for decades. Cawealthexodus This is more advocacy than analysis, but the underlying point — that the shadow of a wealth tax changes venture capital location decisions and founder residency decisions for the next generation of billionaires — is real and essentially unmodeled by either side.
3. The "even if it fails" damage. California could end up losing tax revenue even if the ballot initiative doesn't pass, as it incentivizes wealthy residents to escape before the tax passes. Americans for Tax Reform The January 1, 2026 residency trigger was already in the past when the initiative cleared the Attorney General in December 2025. Billionaires who moved in 2025 already escaped it. But for future proposals — and there will be future proposals — the chilling effect of the initiative's existence is itself a behavioral signal that changes location calculus permanently.
4. The Massachusetts comparison is not analogous. Proponents frequently cite Massachusetts, where a 4% millionaire income tax surcharge passed in 2023 and the number of millionaires actually grew afterwards. A May analysis found the number of millionaires in Massachusetts rose nearly 39% in the two years after the tax took effect. CBS News But this is measuring income millionaires, not wealth billionaires, and it's an income tax, not a wealth tax — a fundamentally different behavioral trigger. An income tax takes a cut of what you earn each year; a wealth tax demands that you liquidate or borrow against what you have accumulated. The behavioral elasticity is categorically different.
Bottom Line
The honest answer is that nobody — not the LAO, not Saez/Berkeley, not Hoover/Stanford — has built a model that adequately integrates: the compound income tax loss, the liquidity-driven market effects of forced asset sales, the startup ecosystem chilling effect, the legal/administrative cost of mass valuation disputes, and the deterrent effect on the next generation of wealth formation in California. The proponents' $100B figure treats behavioral response as noise. The opponents treat it as catastrophic. Both are advocacy, not analysis.
What California's fiscal structure actually calls for is a multi-year dynamic scoring model — the kind the Congressional Budget Office does for major federal tax legislation — that incorporates behavioral elasticity at the billionaire-wealth level. That model doesn't exist in the public domain because nobody with the data to build it (the Franchise Tax Board, which has actual taxpayer records) has the political mandate to do it honestly, and nobody with the political mandate has the data.
The LAO came closest, said "very hard to predict," and was correct.
The Trap Has Already Closed. The Question Is Who's Inside It.
There is a well-documented historical pattern that California has already lived through once, in slow motion, and is now experiencing at warp speed.
What has already happened
The behavioral response began the moment the initiative was filed in October 2025 — months before it could possibly appear on a ballot, let alone pass. The January 1, 2026 residency trigger was deliberately designed as a trap, but traps only work on people who don't see them coming. The billionaires saw it coming.
In the ten days before Christmas 2025, Sergey Brin terminated or relocated 15 California LLCs, with seven reregistered in Nevada. His fellow Google co-founder Larry Page made the same move weeks earlier. Among the entities Brin moved were companies managing his $450 million superyacht and a private air terminal at San Jose International Airport. An LLC tied to both Page and Brin called T-Rex, formed in 2006, was converted into a Delaware entity and renamed T-Rex Holdings on December 24, 2025, with a principal office in Reno, Nevada. Page paid $101.5 million for a Biscayne Bay waterfront compound in late December, then bought a second nearby estate for $71.9 million on January 5, 2026.
Several made major moves before the residency cut-off date, including Peter Thiel, David Sacks, and Larry Ellison. Page purchased $173 million worth of property in Miami while moving assets out of California. A relocation attorney said he personally helped four billionaires leave the state ahead of the January 1 deadline.
The American Prospect, arguing against the exodus narrative, tried to push back by noting that Page, Brin, and Thiel were moving offices, not necessarily themselves. But since the tax only applies to those who were California residents as of January 1, 2026, moving at this point or later wouldn't affect their wealth tax liability. That is precisely the point — the people who moved in time did so because they were watching, and the people who didn't escape the retroactivity window are now trapped anyway. The initiative successfully ensnared exactly those billionaires too slow or too publicly committed to California to move in time.
But here is where the story takes its genuinely counterintuitive turn.
The Prop 30 Precedent: Behavioral Response Ate Half the Revenue
This dynamic has a well-documented California precedent that the proponents are systematically underweighting. In 2012, Proposition 30 raised top marginal income tax rates by up to 3 percentage points — one of the largest effective tax rate increases in recent U.S. history. Stanford researchers Joshua Rauh and Ryan Shyu found that behavioral responses eroded 45 to 61 percent of projected revenues within two years.
The critical insight in that research is where the erosion came from. In the case of Prop 30, 90% of the revenue erosion can be attributed to residents' behavioral response — restructuring, income shifting, reduced investment — while only 9% was caused by out-migration itself.
This matters enormously for the current debate, which is almost entirely focused on whether billionaires will physically move. Whether they move or not is almost beside the point. Rauh found that Prop 30 resulted in a 53% increase in out-migration for affected high earners in the year following its passage, but the migration story was a sideshow. The main event was behavioral restructuring by people who stayed.
A wealth tax, by its nature, triggers larger behavioral responses than an income tax, because wealth restructuring is more flexible than income restructuring. You can move your business entities to Delaware (as Page and Brin literally did), hold assets in out-of-state trusts, restructure equity into offshore vehicles, or change the legal character of holdings in ways that make them harder to value. Billionaires with teams of accountants and lawyers — the very people watching pending legislation closely, as you noted — have a much wider menu of legal avoidance tools against a wealth tax than against an income tax.
The Shift to the Middle: The Historical Pattern California Has Already Run
Here is the mechanism by which the trap closes on the middle class, and it is not theoretical. California has run this experiment before.
About 40% of California's personal income tax volatility is due to the rate structure, which taxes higher incomes at higher rates and amplifies the volatility of taxes paid by high-income taxpayers. About 20% of PIT volatility is due to deductions and credits, which mostly serve to reduce the tax liabilities of low-income and middle-income taxpayers, whose total income is remarkably stable. The LAO's own analysis, buried in a technical report, makes the core observation explicit: the state has deliberately structured its tax system so that the stable income — middle class wages and salaries — is protected from volatility, while volatile income — capital gains and stock compensation at the top — provides the revenue swings. When the top contracts, that volatility hits the general fund hard, and the adjustment mechanism is service cuts, not tax increases on the middle, because there is no political path to raising taxes on people earning $80,000 a year.
But the adjustment over time is more insidious. The real California exodus is not the billionaires — it is everyone else. It is the people who actually pay income taxes and work for the companies that buttress the state budget. That is the exodus California needs to prevent. High-earning professionals, the $300,000–$800,000 income tier that makes up the working rich rather than the investing rich, are far more mobile than their income suggests. They don't have Page and Brin's legal teams, but they can and do relocate for much smaller tax differentials, particularly when the tax environment signals ongoing escalation.
A Stanford University paper on Prop 30 showed wealthy residents were about 40% more likely to leave after it passed. Those departures and other responses also eliminated 45.2% of the revenue the state expected to get from high earners. The revenue didn't go away immediately — it eroded over years, and the gap was filled by the combination of the tech boom (which temporarily papered over the structural problem) and deferred maintenance of the tax base.
The Ratchet Mechanism
This is a ratchet with three teeth. First, the wealth tax proposal itself, whether it passes or not, has already driven some fraction of the target population to establish legal and physical residency outside California. That revenue is permanently gone. Second, the proposal signals to the next tier of high earners — the people worth $50M–$999M who are not currently targeted — that the principle of wealth taxation has been established. Their planning horizon shifts accordingly. Third, and most perversely, if the tax passes and raises less than projected because the behavioral response was larger than Saez's model assumed, the resulting revenue shortfall will need to be filled somewhere. The politically durable options are service cuts or taxes on a population that cannot easily relocate: the middle class.
As ultra-wealthy exit, taxes fall on remaining middle-class residents, or lead to cuts in services the tax targeted to begin with. This is not conservative advocacy — it is the arithmetic of a tax base structured the way California's is.
The One Number That Frames It All
In 2019, the top 1% of income earners paid almost 45% of all personal income taxes in California. The personal income tax provides roughly 70% of California's general fund revenue. That means approximately 30% of all California general fund revenue comes from fewer than 200,000 households. The billionaires are a tiny subset of that group, but they sit at the apex of a pyramid where each departure has outsized, cascading fiscal consequences — not because of what they pay in wealth taxes, but because of what they pay in annual income taxes on capital gains, stock compensation, dividends, and investment returns.
The billionaire tax, in this light, looks less like a fiscal policy and more like a political one: it lets legislators and union advocates say they made the wealthiest pay their fair share, regardless of whether the fiscal math closes. And when it doesn't close, the gap falls on whoever is left inside California's borders and cannot leave — which has historically been the middle class, who pay their taxes in stable, predictable wages, and get service cuts in return when the volatile top of the pyramid contracts.
The damage may already be done based on the available evidence. The question now is how large the damage is and whether California's political class has the honesty to account for it before the next budget cycle makes it undeniable.
We've Seen This Play Before -in the Rust Belt
The Rust Belt analogy is more precise than it might initially appear, and it operates on several levels simultaneously — some obvious, some deeply counterintuitive. Let me work through the comparison carefully, because the parallels cut in directions that should make people on both sides of the California debate uncomfortable.
The Core Mechanism Is Identical: Economic Monoculture Meets Exit
The Rust Belt catastrophe was not caused by a single policy decision. It was caused by something more structural: entire regional economies had become dependent on a single economic driver — steel, automobiles, heavy manufacturing — and when that driver lost its competitive position, the tax base didn't decline gradually. It collapsed in a self-reinforcing spiral.
From 1950 to 2013, Detroit's population fell by 63%. The number of occupied homes and apartments fell by 49%. The number of Detroit residents holding a job declined by 74%. The mechanism the Chicago Federal Reserve identified at the Detroit bankruptcy conference is worth quoting almost verbatim: a crisis facing a city like Detroit is caused by people leaving the city as the costs for services accumulate. This exodus leads to a failure of the city's financial model as service demands escalate and those best able to pay for services move outside the city's boundaries.
Read that twice. People leaving causes costs to accumulate, not decline, because the infrastructure built for a larger population — water systems, roads, pension obligations, retiree healthcare, schools — doesn't contract with the population. It becomes a fixed cost spread over a shrinking revenue base. The city raises taxes on those who remain to cover the gap, which accelerates the departure of those who remain, which raises costs further, which raises taxes further. This is the death spiral, and it runs identically whether the economic driver being lost is an auto plant in 1979 or a billionaire's capital gains in 2026.
Some of the named causes for the Detroit bankruptcy are the shrinking tax base caused by declining population, program costs for retiree healthcare and pension, borrowing to cover budget deficits, and poor record keeping. California, with its structural deficit, its already-strained Medi-Cal budget, its pension obligations to public employees, and its practice of deferring hard fiscal decisions, is building a structurally similar inventory of fixed costs even before the tax base compression begins.
The Monoculture Parallel Is Exact
Detroit's fatal error was not individual bad policy decisions, though there were many. It was the economic monoculture. The auto industry was so powerful and so rich, and the auto workers union was able to win such great benefits for the workers, that few other industries were willing to come into the city and compete for that labor pool. Detroit was a one-industry town. When that industry faced global competition and initially was unable to compete, the fortunes of Detroit plummeted rather quickly.
California's version of this monoculture is different in form but identical in structure. The state is not dependent on one employer. It is dependent on one category of income: capital gains and stock compensation generated by the technology sector and its associated venture capital and private equity ecosystem. When that income is good — as it was during the 2020–2021 tech boom — California runs historic surpluses. When it contracts — as it did in 2022–2023 — deficits materialize almost overnight.
About 40% of California's personal income tax volatility is due to the rate structure, which taxes higher incomes at higher rates and amplifies the volatility of taxes paid by high-income taxpayers. The LAO has documented this explicitly: California's tax system is structurally engineered to maximize revenue when the top of the distribution does well and to crater when it doesn't. Every policy choice that further concentrates revenue at the top — including, paradoxically, a billionaire tax that makes high earners more likely to restructure their affairs or relocate — amplifies that underlying volatility.
The Rust Belt states didn't choose economic monoculture as a deliberate policy. It evolved organically over decades as the strengths of their natural advantages — coal proximity, waterways, labor pools — compounded. California's fiscal monoculture evolved similarly, as the tech boom compounded decade over decade and state government grew to match the revenue peaks rather than the averages. The structural error in both cases was the same: building spending commitments sized for the boom and treating boom revenue as permanent.
The Speed Difference Is Crucial — And Cuts Against California
Here is where the Rust Belt analogy becomes not merely instructive but alarming, because California's version of this problem will move faster than the Rust Belt's did, not slower.
The Rust Belt's economic decline played out over thirty years. Steel mills closed one by one through the 1970s and 1980s. Population decline was measured in decades. Between 1950 and 1980, the region lost 28% of its total number of jobs, and the loss of manufacturing jobs was a staggering 34%. That is a devastating rate of change — but it gave communities time to adapt, time for political responses, time for some workers to retrain or retire naturally. The decline was traumatic, but it was not instantaneous.
Capital, unlike a steel mill, is completely mobile. A factory cannot be loaded onto a truck and driven to Texas in a weekend. Page and Brin's LLC network was reregistered in Nevada in the ten days before Christmas 2025. Larry Ellison's San Francisco home sold as his family offices relocated their principal addresses. Wealth that took decades to accumulate can change its legal address in a fortnight. The analog in the Rust Belt would be if U.S. Steel had been able to physically teleport its Pittsburgh facilities to South Korea overnight in 1978. The economic consequences would have been the same, but compressed into weeks rather than decades, giving no one time to respond.
This speed matters enormously for the fiscal math. Detroit had time — misused, but available — to borrow against future revenues, sell bonds, defer pension contributions, and exhaust every financial gimmick before the terminal crisis arrived. The city had been avoiding its fiscal troubles by issuing Fiscal Stabilization Bonds in 2005, 2006, 2008, and 2010. The city had an accumulated deficit of $326 million at the end of fiscal year 2012. Each of those maneuvers bought time. California's version of this will have less runway, because the behavioral response is occurring before the tax is even law, and the revenue loss will manifest in annual income tax collections long before any political response can be organized.
The Key Divergence: Detroit Had No Replacement. California Might.
The Rust Belt comparison also has an important disanalogy that California partisans are right to emphasize, though they often misread what it actually means.
Detroit had no replacement for steel and automobiles because those industries were fundamentally place-dependent — tied to ore deposits, waterways, and existing industrial infrastructure. When they left, the agglomeration advantages that created them left too. There was nothing pulling comparable industry back.
California's technology sector has genuine agglomeration advantages that are not purely tax-sensitive: Stanford and UC Berkeley, decades of venture capital networks, the world's deepest pool of engineering and AI talent, proximity to Asia-Pacific trade, and a culture of risk-taking that genuinely does not exist at the same density anywhere else. Brookings found that cities like Pittsburgh, Columbus, Minneapolis, and Milwaukee — Rust Belt communities that survived by attracting universities and diversifying their knowledge economy — are today economically diversified, dynamic, and growing metro economies. Pittsburgh's revival through Carnegie Mellon's robotics and AI programs is the template for what California could be if it retains its universities and research culture even while losing its billionaire class.
But — and this is crucial — Pittsburgh's revival required decades of investment, pain, and population loss before it came. Cleveland's 38.7% poverty rate and Youngstown's status as leading the nation in concentrated poverty are the other outcome, and they are far more common in the Rust Belt than Pittsburgh's recovery. The question is not whether California has the potential to recover from a billionaire exodus; the question is whether its political and fiscal structure can survive the transition period without a Detroit-style cascade of service cuts, deferred obligations, and infrastructure deterioration that drives out the next tier of mobile residents — the middle class — before any recovery can take hold.
The Trap Closes on Fixed-Income Residents
As people fled the Rust Belt, tax revenues collapsed, creating a downward spiral where remaining residents couldn't maintain infrastructure built for much larger populations. The people left behind were not primarily the poor by choice — they were the people who could not leave: the elderly on fixed incomes, the workers whose pensions tied them to local government promises, the homeowners whose property values had already declined below the price of relocation, the community-rooted families who depended on local social support networks.
In California, that population looks somewhat different but plays the same structural role. It is the middle-class homeowner in the Inland Empire who has lived in their house for twenty years and cannot afford to buy equivalent housing in Nevada or Texas. It is the public school teacher whose CalSTRS pension is a California-only instrument. It is the state and county government worker whose career investment is place-specific. It is the small business owner whose customer base is geographically locked in. These are the people who cannot follow capital out of the state, and who will bear the consequences of the fiscal gap that capital's departure creates — through higher fees, deteriorating services, deferred maintenance of parks, roads, and schools, and the quiet erosion of the public goods that make the state livable.
The billionaire tax was sold as making the wealthiest pay their fair share. The uncomfortable historical precedent from the Rust Belt is that when the wealthiest exit, the burden of maintaining the infrastructure they helped fund does not disappear. It redistributes to whoever remains.
The Political Economy Parallel: What Made the Rust Belt's Decline Irreversible
There is one final dimension of the Rust Belt comparison that deserves direct statement: the political economy of denial.
Rust Belt city governments, for years before the terminal crisis, faced the same basic choice California faces now: acknowledge structural decline early and adjust the spending base to match a permanently smaller revenue base, or borrow against future revenues, defer pension obligations, and maintain the political fiction that the decline was temporary. Almost universally, they chose the latter. The city of Detroit had been running deficits for ten years caused by declining tax revenues, withdrawal of financial support from the state, and expenses that were not reduced rapidly enough.
The political incentive structure made denial almost rational in the short term. The voters most present at the ballot box were the union workers, retirees, and city employees whose benefits depended on the fiction of fiscal solvency. The people whose interests required honest accounting — future taxpayers, bondholders, the mobile residents who could still leave — had weaker political voice and clearer exit options. So the accounting was not honest, the adjustments were not made, and the terminal crisis arrived with compound interest.
California's equivalent political economy is visible today: the same tension between the organized constituencies (public employee unions, healthcare unions proposing the billionaire tax) whose interests are served by maintaining current spending levels, and the diffuse, unorganized interests of future taxpayers and mobile residents who have not yet left. The Rust Belt's lesson is not that California is doomed — Pittsburgh exists — but that the window for honest reckoning is shorter than it feels from inside it, and that the political system's incentives almost uniformly push toward delay.
The most important difference between California 2026 and Detroit 1979 is that California's policymakers have the advantage of observing the Rust Belt outcome in full detail and in retrospect. They know exactly what the death spiral looks like. The question is whether that knowledge is sufficient to overcome the political economy that made the Rust Belt's decline so predictable and so inevitable — or whether the analogy will be recognized only in retrospect, when it is too late to matter.
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