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The writer is a longtime Silicon Valley investor
What do you do if you occupy a powerful position in a state with the highest personal income tax rate in the US? If you’re the leader of one of California’s most powerful unions or Ro Khanna, a Californian congressman positioning himself for the 2028 presidential race, you try to confiscate the possessions of California’s wealthiest residents. It’s a plan that in the long term will punish not the wealthy but everyday Californians.
That’s the backdrop for a proposed one-time wealth tax in California. If added to the election ballot and passed this November, it would seize 5 per cent of the assets of anyone whose net worth — whether liquid or illiquid — exceeds $1bn, which includes people like me.
This proposal, echoed in various other states, is the latest in a debilitating series of policies that, over the past 70 years, have undermined California’s position as a cradle for progress.
In 1957, Fairchild Semiconductor, the company that spawned Silicon Valley, was formed by eight men — only one of whom was born in California. At the start of that decade the state’s population was about 10.5mn and only about 11 per cent of its revenue of $1.1bn came from personal income taxes. The sales and use tax (levied on products not services) accounted for almost 60 per cent.
Today, California’s population is about 39.5mn while its budget is about $320bn (not including the $174bn the state receives from Washington for social welfare programmes). Since 1990, the budget has grown at an average rate of 6 per cent a year.
Compared to the 1950s, the source of the state’s revenue has entirely flipped. In recent years personal income taxes have contributed more than 60 per cent of the total. This revenue rests on a foundation of jelly. In 2022, the top 1 per cent of California taxpayers — just 170,000 payers — coughed up about 40 per cent of all the state’s personal income tax revenues. Worse still, these payments are highly contingent on unpredictable capital gains.
This reliance on a few deep pockets has happened gradually over the past 50 years. In 1978, Proposition 13 deprived the state of its most predictable source of revenue by putting a cap on property taxes and the rate at which these could be increased.
Meanwhile, public service workers gained more power in the mid-1970s when schoolteachers were granted the right to strike followed, in 1977, by the rest of the workforce. Today, they are organised into 21 different bargaining units. Two examples of this concentration of power are the catastrophic 1999 legislative decision to give state employees a retroactive pension increase and the fact that 40 per cent of California’s General Fund must be spent on K-12 education — a tribute to the strength of the teachers’ union. Yet the standard of public education in California trails the national average.
In addition, the state is responsible for around $200bn of unfunded pension liabilities for state employees. Unlike their private sector counterparts, state employees don’t have to plan for their own retirement as their plans are guaranteed by the state. Those Californians without a retirement safety net are also on the hook for more than $85bn in associated retiree and health benefits for state workers. In 1961, the state contributed about $5 per employee per month to cover the same bills.
It would be one thing if, even with the highest taxes in the country, the state had delivered for its citizens — but it has failed on almost every count. California has the nation’s highest unemployment rate, its highest homeless population, its highest median housing prices, and its highest gas and electricity prices (save for Hawaii). Tragically, student tuition fees at what was once a beacon for public education, the University of California, Berkeley, have risen from about $1,000 a year in 1980 to about $17,500 today.
The irony of the proposed wealth tax is that people like me will be just fine. We can either clench our teeth and pay or follow those who have fled for more hospitable climes with no personal income tax such as Florida, Nevada and Texas (which, incidentally, passed a constitutional amendment banning a wealth tax). The same holds for ambitious youngsters wanting to start the next Alphabet, Meta or Fairchild Semiconductor.
But if just a fraction of California’s deepest pockets leave the state as result of this wealth tax, it will be the hard-working people of California who will have Congressman Khanna and his acolytes to thank for what could amount to a $0.5tn tax bill coming their way over the next decade.
