California’s experiment with a wealth tax is colliding with an awkward reality: the people and capital it targets can easily leave, while state spending keeps rising faster than the economy that must support it. The result is a budget that looks large on paper but increasingly rests on a shrinking group of high earners who are already voting with their feet.
Governor Gavin Newsom has proposed a $348.9 billion budget for 2026-27. This is roughly $147 billion higher than when he took office, representing a spending increase of more than 70 percent in under a decade that heavily outpaces both population and inflation. About $248 billion comes from the General Fund, with a limited share in reserves, so a record level of spending depends almost entirely on volatile income tax receipts from top earners and capital gains.
The state’s nonpartisan Legislative Analyst’s Office (LAO) has called the fiscal outlook “alarming” and raised “serious concerns” about long-term sustainability. They project structural deficits that could reach roughly $35 billion a year later this decade if spending keeps running ahead of revenues. At the same time, California still faces crushing housing costs, persistent homelessness, and schools that underperform despite record per-pupil spending above $27,000. A budget that has grown more than 70 percent has simply failed to produce equivalent gains in core services.
Into this picture comes the 2026 California Billionaire Tax Act, a proposed 5 percent wealth tax on worldwide net worth above $1 billion. Proponents present this as a limited, temporary levy, but the legislation actually functions as a constitutional amendment that permanently removes the state’s existing 0.4 percent cap on taxes on intangible personal property. The rational response among the targeted individuals has been immediate.
Recent research from the Hoover Institution highlights the severity of this capital flight. Nearly 30 percent of the Act’s wealth tax base departed before a single signature was even collected. While proponents projected $100 billion in new revenue, actual collections will likely hover around $40 billion. Furthermore, the state relies heavily on its top 212 billionaires, who contribute an estimated $3.3 to $5.8 billion annually in state income taxes. The present value of permanently lost income tax collections from departures more than fully offsets the one time wealth tax revenue, yielding a net present value of negative $24.7 billion.
This matters immensely because the state’s finances rest on a very narrow base. The top 1 percent of earners historically supply around 40 to 50 percent of income tax revenue, much of it from capital gains realized by exactly the individuals now seeking the exit. When those taxpayers leave, California forfeits decades of income tax payments, capital gains receipts, property tax contributions, and business-related revenue tied to their companies and employees.
California remains one of the highest-tax states in the country for upper-income residents, and the LAO still projects hundreds of billions in annual General Fund revenue. The pressure comes from commitments that have grown even faster, including formulas that ratchet up education funding, expanding health and social service programs, and rising pension and retiree health costs.
The LAO emphasizes that multiyear deficits appear because ongoing obligations outstrip what a healthy tax base can reliably support through normal cycles. Medi-Cal and related programs illustrate the pattern, with costs growing at or near double digits in recent years and new eligibility expansions adding billions more in projected obligations. At the same time, state audits have documented major waste and fraud, including tens of billions in improper unemployment insurance payments and unresolved federal borrowing that leaves employers paying higher payroll taxes. High-speed rail has already consumed many billions while falling far behind schedule and still demands new infusions of cash. When spending rises faster than inflation and population yet marquee programs underperform, the core problem is clearly a severe lack of fiscal discipline.
Supporters of the wealth tax claim only billionaires will feel the impact. Evidence from earlier policy moves suggests a completely different story. After California raised top-bracket income tax rates in the early 2010s, research found that high earners became significantly more likely to change residency. Roughly half the expected extra revenue never materialized once behavioral responses and migration were accounted for. Out-migration broadly accelerated, and the state leaned more heavily on upper-middle-income households with far less flexibility to leave.
The current billionaire flight risks repeating this pattern on a larger scale. Once wealthy residents depart, their tax contributions are gone permanently and the state will eventually look to the middle class to fill the gap. The burden of this shift will inevitably fall heavily on engineers, nurses, teachers, and small business owners. These are individuals rooted in California by mortgages, schools, and extended family who will face higher income taxes, sales taxes, and local levies as the tax base at the top keeps eroding.
California still has room to change direction. The LAO has urged lawmakers to align ongoing spending with realistic revenue expectations, rebuild reserves, and avoid budgets that depend on optimistic market gains or a permanently captive population of ultra-rich taxpayers. Doing so would require serious performance and cost-effectiveness scrutiny for major programs such as Medi-Cal, K-12 education, and large infrastructure projects, as well as strict follow-through on fraud and waste already identified in audits.
In a country where people and capital can move freely across state lines, building a $348.9 billion budget on an ever-smaller group of highly mobile taxpayers is an exceptionally reckless strategy. Early signs from the wealth tax fight show those taxpayers eagerly leaving for more competitive jurisdictions. Unless Sacramento drastically cuts the spending side of the ledger, California will discover that the fortunes it plans to expropriate have relocated long before the bills come due.
