California’s proposed wealth tax aims to target the balance sheets of the state’s ultra-wealthy residents. But the policy largely misses how many billionaires actually fund their lifestyles: by borrowing against their assets tax-free, instead of realizing income through sales or salary. As long as that borrowing model remains intact, a one-time wealth levy may generate a large upfront sum — but it does little to change the long-term system that lets cash-poor billionaires spend heavily while reporting minimal taxable income.
Why the Billionaire Tax Act May Be More Symbolic Than Structural
California is currently considering the Billionaire Tax Act, a ballot initiative that would impose a one-time wealth tax of 5% on the net worth of state residents worth $1 billion or more. The tax would apply to anyone who was a California resident on January 1, 2026, with payment due in 2027. The law would allow payment to be spread over five years, with an added fee for installments.
Supporters argue the wealth tax could raise approximately $100 billion, which they say would help offset projected federal healthcare cuts and fund public programs. Opponents, including Gov. Gavin Newsom, argue the tax could prompt wealthy residents to relocate, shrinking the state’s tax base and undermining long-term revenue goals.
The Real Issue: Billionaires Don’t Live Off Salaries
To understand why the proposed wealth tax may miss the target, it helps to look at how modern billionaires generate spendable cash. Many do not rely on regular salaries. Instead, their wealth is tied up in appreciating assets such as company shares, real estate, or private holdings.
Rather than selling assets and realizing taxable gains, they often borrow against their holdings. Because U.S. tax law does not treat borrowed money as income, this strategy lets them access cash without triggering an income tax bill.
This approach has been described as the “buy-borrow-die” model:
- Buy: Acquire assets expected to appreciate over time.
- Borrow: Use those assets as collateral for loans, including margin loans or securities-backed credit lines.
- Die: Heirs inherit assets with a stepped-up basis, eliminating most of the embedded tax liability.
Why a One-Time Wealth Tax Doesn’t Change the Borrowing Loophole
California’s own fiscal experts have acknowledged that many top earners avoid large state income taxes by borrowing instead of selling stock. A one-time wealth tax would capture a one-off revenue event, but it would not change the incentive structure that allows billionaires to live off tax-free loans.
In practice, this means the tax could force asset-rich residents to sell stakes or relocate to avoid paying. The result may be a short-term revenue gain but a long-term loss of tax base, particularly if wealthy individuals choose to establish residency elsewhere.
Critics argue this tax could accelerate a broader trend of wealthy residents leaving California. Venture capitalist Chamath Palihapitiya has estimated that roughly $1 trillion in billionaire wealth has already left the state, suggesting the tax fight may already be reshaping where the ultra-rich choose to live.
What Would Actually Fix the Problem?
Experts say the real issue is not the stock of wealth, but the flow of tax-free cash that comes from borrowing. If policymakers truly want to address the tax avoidance structure, they must target the mechanisms that allow tax-free loans and unrealized gains.
Possible reforms include:
- Taxing wealth proceeds instead of just wealth stock
- Closing loopholes that treat borrowing as non-taxable
- Requiring repayment or partial taxation of loans used for personal spending
- Reducing the “stepped-up basis” advantage at death
Unless California changes the underlying tax structure, a one-time wealth tax may be a dramatic political gesture — but not a lasting solution.
For a deeper overview of how wealth is taxed and how borrowing affects taxable income, readers can review guidance from the Tax Foundation, a respected tax policy research organization.
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