California is considering Proposition 40, a ballot measure set for the November 3 election that would impose a one-time 5% wealth tax on residents with a net worth exceeding $1 billion. Proponents, including French economist Gabriel Zucman, now based at the University of California, Berkeley, argue the tax could generate $100 billion in revenue for the state. However, this projection has drawn criticism from economists at the Hoover Institution, who suggest the revenue impact would be substantially lower when accounting for behavioral changes and legal challenges.

Hoover Institution economists Benjamin Jaros and Joshua Rauh contend that the wealth tax would likely raise only about $30 billion after considering that some provisions would be blocked by courts and that many billionaires would relocate to other states to avoid the tax. They also estimate that the resulting decline in annual income-tax payments from departing wealthy residents could exceed the wealth tax revenue by nearly $39 billion over time.

Zucman has challenged the Hoover economists’ assumptions, particularly their expectation that billionaires would leave California based on concerns the tax might be extended beyond its initial application. He argues that it is not standard practice in economic modeling to predict such behavioral responses unless a clear legislative extension is certain. Nonetheless, economists such as former Obama adviser Jason Furman note that it is common to factor in behavioral consequences in fiscal estimates, including changes in taxpayer residency and investment decisions.

Critics point out that Proposition 40 would not simply impose a one-time tax but could also remove the state's constitutional cap on intangible personal property taxation, potentially paving the way for future wealth taxes at various rates and thresholds. The measure would allow the Democratic-controlled state legislature, with a two-thirds majority, to extend the tax or lower the wealth threshold, raising concerns about a permanent and expanding tax burden on high-net-worth individuals. Zucman himself has acknowledged the possibility of future annual wealth taxes, even suggesting a 2% ongoing tax in interviews.

Supporters of Proposition 40 also argue the tax is necessary to offset anticipated cuts to Medicaid following federal GOP tax reforms. However, federal Medicaid payments to California increased by 14% over the past year, and most budgetary savings from the 2025 federal reforms are projected for the longer term. Some analysts suggest that revenue from the wealth tax could quickly be absorbed into expanding Medicaid expenditures, increasing the likelihood of calls to extend the tax beyond its initial application.

The debate over Proposition 40 highlights longstanding tensions in California politics regarding taxation of the wealthy. Since 2012, Democratic lawmakers have pursued temporary income tax increases on high earners, subsequently seeking to extend and make permanent these hikes, as well as to broaden the tax base. The potential for billionaires to leave the state in response remains a central point of contention, with differing views on whether such relocations are rational responses to tax policy or overestimated by critics.

Overall, the Proposition 40 debate encapsulates broader questions about tax policy, revenue forecasting, and economic behavior in high-tax states. It also raises concerns about how new wealth taxes could reshape California’s fiscal landscape and the political dynamics surrounding taxation at the state level.