California's Wealth Tax: What Happens When the ‘One-Time’ Rule Gets Applied | Hank Adler

A number of billionaires have declared that they're leaving California because of a new proposal called wealth tax that's gonna be on the ballot in 2026 this November. You may wonder what's the impact of this on California. Our guest today is Hank Adler, who's a Chapman professor, also he's a tax expert. He's going to tell us more about this proposal, how it works and why it matters They think that there's $2 trillion of net worth for the billionaires in California. So they expect to pick up a hundred billion. If you were a citizen on January 1st, 2026, there's essentially nothing you can do to get around it. So yeah, some people are going to leave and maybe equally or more important, people are not gonna come. I'm Siamak Korami, welcome to California Insider. Hank, it's great to have you back and welcome back. Oh, it's great to be back. Great to be here. We wanna talk to you about a proposal that's actually gonna be on the ballot in 2026, this year on wealth tax. Can you tell us what's happening? What is this proposal about? Well, the general proposal is they wanna have a 5% wealth tax on individuals that have wealth of $1 billion or more. It's got an odd progressive ring to it. The first billion dollars, there's no tax. For the next hundred million dollars of wealth, there's a 55% tax. And then everything over a billion one is subject to a 5% tax. So very unusual calculation, mainstay being just a wealth tax of which we've not had. And how much money this is gonna generate? This is gonna generate a couple of hundred billion, that's estimated. They think that there's $2 trillion of net worth for the billionaires in California. So they expect to pick up a hundred billion and they expect to spend it over three or four years. And what are they gonna do with the money? Is that in the proposal? Well, 90% of it is earmarked for healthcare. I'm gonna say a wide variety of healthcare, but mostly designed for people that can't afford their healthcare. There's 10% in there for education. There's an element where they're doing this in a way where people cannot leave now, right? If there's about 200, 250, we don't know the number, the exact number of the billionaires, but they have an element where if you're a billionaire, you cannot leave now, right? Yeah, it's a really interesting format. What they've said in the final draft is if you were a citizen on January 1st, 2026, there's essentially nothing you can do to get around it. It's gonna be based upon net worth at 1231, but if you were a resident on January 1st, you're gonna be exposed. And what is the net worth? How do they calculate that? How does that work? Obviously, you said a minute ago, there were a few nuances, but essentially it is 100% of the fair market value of all of your assets with a couple of exceptions. Directly owned real estate is not considered part of your net worth. And if you have tangible personal assets outside the state, it's not gonna be included. And then I think there's a $5 billion exemption for personal assets. And what's the likelihood of this passing? Do you think this is a- Your guess is as good as mine. On one side, you have, there are billionaires that can afford to pay this tax, and we'll hopefully talk about what it'll take to find the money to pay the tax. On the other hand, you have the governor who is adamantly against this. I mean, the terror is that these people will leave, they will take their jobs with them, we will lose our tax base, and it would be just horrible for the state. There are some that are already saying that they're leaving. Can you tell us about that? Well, there are two that have talked about it. They're the two Google founders. One of them in particular has apparently moved a lot of LLC stuff out of the state. It's not hard to leave if you do it properly. So yes, I mean, some people are going to leave, and maybe equally or more important, people are not gonna come. You know, why would I, if I was a billionaire, why would I come to California? Now, there's an exception there. The promoters of the initiative have said it's a one-time tax. But there's no such thing as a one-time tax. We can put something on the ballot for the next year or the following year or another year. So there's no guarantee that it's only a one-time tax. As someone reporting on California's economy and policies every week, unfortunately, I see the middle class shrinking in California. Some of it has to do with our policies, and there is another side to this that we are facing major inflation here and across the country. Unfortunately, the dollar has lost 10% of its value just this year to date. That's why more and more people are turning to real assets to protect their financial future, like physical gold and silver from American Heart Fold Gold. Unlike paper assets, these tangible investments can't be controlled or devalued by inflation or bad policies. 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But historically, people have moved out of, and I'll point to New York, they've taken their business with them. If you look, there are, I believe, four taxpayers, residents of California, the two Google fellows, Zuckerberg from Meta, and I hope I pronounce this right, Mr. Wong from NVIDIA. They're 40% of the tax base. So they would be exposed to $40 billion worth of taxes. Well, they control 100,000-plus employees. So if they chose to, they could move with them or they could just begin hiring in other places. I think it would be quite sudden with respect to the existing players. Mr. Wong from NVIDIA said, he's fine, he's not moving. But I think, would I move for $10 billion or $15 billion a year? I'm out of here tomorrow morning. Obviously, I don't have that kind of money, but I think it would be quite sudden and dramatic. You mentioned people coming to you Yeah, why would I move here with the, we already have, I mean, it's common knowledge that we're losing employees, we're losing high-wage people with our current high taxes. I was in a business that I thought had a chance to get to a billion dollars. Why would I possibly choose California? I can always have a second home here, but I want to build my business someplace where people want me to come and build my business. How would this get calculated? So would they just look at people's assets? What's the process? Well, the process would be, it's a little, remember, this is all new stuff. But essentially, it would be on the taxpayer, the resident, to calculate their net worth as of 12-31-2026. The tax return would be due on April 15th. The reason I smiled is if you fight your way through the law, the Franchise Tax Board's not required to have the necessary forms until after April 15th, 2026, which seems a little odd. And then the Franchise Tax Board has the opportunity to audit. So some of this fair market value, we just go to the New York Stock Exchange or Wall Street Journal, write down what the number is, and we're done. For everything else, valuation is really, really difficult. And so- So if the company is not public? Nightmare. There's a formula in the initiative that says that a private business would be valued at a specific formula, book value plus seven times earnings. But either the taxpayer, the resident, or the state can go get a certified audit if they don't think it's correct. You know how long that process is gonna take and how much it's gonna cost? Lots of litigation. Between the parties, between the states? Well, sure. And there are interesting penalty regimes. But first off, if we say in a vote, think about it versus an estate tax. When someone passes away, there's a federal estate tax if they're worth more than $30 billion. There are two valuation dates that the estate can use. They can use the date of death or six months after the date of death. Because things happen. You know, we're just picking a magic date. Here, we only select December 31, 2026. How do we value these private businesses? That's an art form. So there'll be a lot of litigation on those people who have private businesses. How are these people gonna pay these taxes? It's the perfect question. You know, the tax is 5%. Once we get past a billion one, no one has $5 billion in a hamper in the back room from their coin collection. So they're gonna have to sell assets. And therefore, you're gonna go through, you know, for the biggest players, let's focus on Mr. Zuckerberg, he's gonna have to sell enough shares of Meta to be able to pay the tax. So assuming they're founder's shares, and I've run these numbers, essentially, it's gonna cost him another, call it 50%. So he's gonna have to sell eight or $9 billion worth of Meta tax. He's gonna have to pay income taxes, 23.8% to the Feds, and 13 point some odd percent to California, so that he can get the money to pay the 5% tax. So it's really gonna cost him about 8%. So it's more because they has to pay taxes on that 5%. Right. Going back to the estate thing we said a minute ago, when somebody dies with an estate, they don't have to pay those income taxes. This is even worse than dying in terms of the cash that's required. There are some talks online that about a trillion dollars have left the state. What are your thoughts on that? I'd be surprised. In fact, I'd be shocked. It's hard to move wealth. We can move people. We can move the owners. Certainly, if I was the $30 billion man, I would already have selected my home in Florida or Texas, and I'd be there on January 1st, 2027. I don't see it. I guess it's possible, but I don't see it from my perspective. We've put in the minds of people that it's time to get out. But I would be surprised if very many people- If people can leave that fast. Yeah. Well, you're not gonna move personnel. So I would have to leave with my stock, and I'd have to be living in another state. What if you're a resident of another state, but your company's here? Do you still have to pay, or is that not clear? I just have to stay out of California 180 days a year. And it's 2026. That's not hard. I can run my business from any place. So you think, if something like this goes through, a lot of these people might go to other states, but then come to California when they need to, and run their businesses from outside of California, if they don't end up moving their business outside. Yes, I think that's exactly what will happen. But normally, when that happens, now we're gonna expand our business. I'm not gonna expand in California, because I gotta fly to California to manage that business. My expansion's gonna be where I reside. So let's assume I move to Austin. People are gonna move to Austin with me, because they want those high-paying jobs. And the taxes, you're not paying California state tax anymore. Right, right. If I'm just owning the intangible stock asset, and I'm not a resident of California, I'm not gonna be paying any income taxes. So I'm gonna erode my base by losing the big player, and I'm gonna erode my base by the big player taking their employees or hiring new employees out of state. You mentioned that this is not gonna be a one-time, but the proposal is one-time. You're saying that if this passes, we're sending a signal that California will do that to others. Right, the promoters have said, and they're correct, this is a one-time tax. But there's nothing in their, they're changing the constitution of the state of California. There's nothing in their changes that don't say that you and I could decide that we need something specific, and we can do a one-time tax in the future. So it's like so many other things. I promise never to do it again. But there's no credibility to that promise. If this goes through, why choose a billion dollars? We don't need $100 million to live. Let's choose $100 million for the next one, and let's do some other great things with the money. There's no expectation in my mind that this would be a one-time event if it passed. Something like this, is it going to, if it passes, would it get challenged in the courts? Is this constitutional to do it? Yeah, there would be, I'm not a lawyer, but there are any number of things we can argue that are unconstitutional. Is it retroactive? Can the voters of California wake up on the first Tuesday in November of 2026 and say, anybody who was here last January, we're going to take some of your money? So I've got retroactive issues. And then a whole handful of, is this a revision to the Constitution or is it an amendment to the Constitution? There are seven or eight or nine constitutional issues. One of the most interesting pieces of the legislation is it provides that if anyone wants to challenge the constitutionality, they have to do it within 60 days of passage of the bill, unheard of. And from what I can read, and my thought process is, every one of those 200 to 250 billionaires would be well-served to file that action against the state to preserve other rights with respect to what happens when they get audited. So I would anticipate that there'd be 200 and some odd lawsuits by whatever that first day of January is in 2027, challenging that constitutionality. And then it would play through the courts for years. Because these people all have legal teams, right? Once I've got a billion dollars, I can probably hire a pretty good lawyer. Hank, I know that you have written articles on this and you've talked about it. You're not a billionaire yourself. No. And you're not paying this tax. So why does it matter to you? I love California and I love fairness. I don't like to see changes in the law that are retroactive that you can't plan for. I kid when I talk to my students about this particular tax, I ask one of them to hand me a pen. I take the pen and I keep it. They say, well, that's not my pen. If I can force the billionaires to pay 5% of their taxes, why can't I have your pen? Why can't I have your Porsche? So to me, it's intellectual. Of course, I'm not anywhere near the zip code that would be affected by this. But the state needs money to run. If you love the state, you want to see business coming into the state. We want to see employment base go up. All the things that make a society work, kind of working against having that happen. Has there been an example of this in other areas? Well, France put a wealth tax in place, it's gotta be a decade ago now, and their citizens left. They left, they lost key people moving to other states, other countries in Europe. That's the United States of America. I can get up and move tomorrow. So it's not been successful. The proposers talk about a narrow, small tax, I think, in Switzerland. But where we've tried to collect big dollars through wealth taxes, it's never been successful. So if this passes, what do you see happening? I think the big players, a handful of the big players, certainly not all of them, are gonna leave the state. They'll probably pay their taxes when they leave, because these are high-profile individuals. They will pay this wealth tax. I can't imagine not paying it. I mean, if it's constitutional, they'll fight it, as I said a few minutes ago, if they're well-advised, I think they will, individually, every one of them will challenge the constitutionality. But I think they'll just get up and leave, and I think they'll take many jobs with them, and I believe that it would be foolhardy to move here. I have a former client who has Alzheimer's disease, and if I was the family, I would move her from where she is in California to another state to avoid any taxes like this in the future. So you think they will move, even though if they have to pay this tax, they will pay this, but they will move because the trust is gone? Yes, I mean, think how smart, the people behind this, the two people, there are four individuals, professionals, professors, for the most part. I've read most of what two of them have written. These are brilliant guys. And they carefully selected January 1st, 2026, so that we couldn't get around it. Well, why wouldn't the next group, them or another, say, we raised $100 billion, we haven't solved anything, this is for general fund-type money, if you think about it. So time goes on, we're near the end of that period, let's do it again, 100 million instead of a billion. Is there really a difference? Rhetorical question, but no. I mean, if they pick billionaire out of the air for this tax, somebody else could choose 100 million. You know, these are huge numbers. What difference does it make? If it's constitutional that I can force you to sell your property to pay a new tax based on your net worth, billion-dollar number's just a number. What is the likelihood of something like this passing? It's going on the ballot, you know, it's called the billionaire tax. Probably a lot of Californians, they're not directly impacted by this, it's only 200-something people. A lot of Californians are thinking, this is gonna impact the billionaires, it doesn't impact me. That's the risk. You have a governor, who is certainly not the most conservative governor in the United States, who is worried about all the things that we talked about. He talked about the two Google founders moving stuff out of state in the last week or two, I believe. I don't know. I mean, it's pretty easy to say tax him, but not me. SEIU, who is behind this, they have a lot of assets, they can spend a lot of money on it. It's not my job to be a predictor, I don't know. I mean, on this one, I really don't know, I almost don't have an opinion. I wanna bring something really important to your attention. There's been some rumors against a dance show company, Shen Yun, that we've been sponsoring. And behind this negative reporting is the Chinese Communist Party, because Shen Yun is reviving 5,000 years of ancient Chinese culture, and showing what China used to be before communism. And the Chinese Communist Party has been having a mission to stop the show. They've been using all sorts of tactics, like slashing the tires of their tour buses, or sending fake bomb threats to the theaters. Despite all of this, this show has been growing significantly across the globe, because it's an amazing performance, and the dancers really put a lot of heart into showing what their ancient culture is. So Shen Yun is coming to Southern California now, and they're gonna be here till early February. Make sure to get your tickets now, and tell us what you think of the performance. Performance that truly matters, each and every one of them. This is what you've been waiting for. Shen Yun. Get tickets now at ShenYun.com. So how about the people that are voting in November? How would they get impacted if this passes, or if this doesn't get passed? Well, if the state is harmed, they're gonna be harmed along with everyone else. I mean, we have a huge state. We have huge social programs. State is not in good financial state. I think everybody would agree to that. So to the extent that we drive out future taxes, we're gonna harm everybody. So if it passes, and you're saying we're gonna drive away taxes, how long does it take for us to see that in our budget? I would guess 2028, but it's just a guess. I mean, they're awfully good at forecasting revenue in this state. It's just a guess on my part, but I would say two years out, we would be looking at the impacts being felt, and those impacts wouldn't go away. That's the tragedy here, is that we would be impacting the state for a very long time if impact, people would leave and take their businesses as I believe they would. Let's say this gets passed, and two years down the line, we realized that people are not coming as much as they used to to California, and some people have left. So we've lost the tax base, and we realized it was a mistake. So now what? How would we revert this? I think it'd be very difficult. You would have to change the legislature. You'd have to change the executive officers of the state, and we'd have to change perception. And perception is difficult to change. We already see the stories about the U-Haul trucks that are moving out of California and not coming in. It takes a long time to change perception. The change of perception just takes years, years and years and years. That the state is a business-friendly, it's a- Yes, yeah, that I'm not gonna have regulation after regulation after regulation, new ideas to make it more difficult to do virtually anything. That perception would take, I think would take a very long time to undo. And you mentioned perception, and this is a ballot initiative, so residents are voting on this. So this perception is coming from the residents in California want to tax billionaires, or want to have wealth tax. It's coming from the bottom, right? From the people. Well, if I was presenting this from the side we should do this, I would not talk about any of those issues. I would talk about, look, we've got these individuals who have more money than they could ever spend, and we should have the right to spend it on healthcare or whatever we think is appropriate. So I don't think that would be the issue. I don't think people would look long-term. They have to look in their hearts. Is it fair to take this away from these people? And I'm sure there'll be some discussion about who would buy all this stock. You've got these four players that are worth $750 billion, and so they're gonna sell 8% of that. Is that, are we gonna be selling stock to sovereign wealth funds? Are we just gonna drive down the fair market value of all the retirement plans that are invested in the top tech companies in the country? That's the way I would pursue it. Some thoughts behind this is to increase revenue for the state. Is there another way to do this? It's difficult. If you believe that we should be raising the money for this particular purpose, which I would suggest is a general fund issue, where there's something called a bill of attainer in the Constitution that we can't say, Bob, Tom, Dick, and Harry are gonna pay for a specific item on the state. We would have to raise income taxes or stop spending money on other things. I mean, the perfect example is we could give up the train. The ability of the state to fund all the social programs it wishes to pay for is a difficult issue. Some would argue we need to cut them back. Some would argue that we need to raise the income taxes a little bit. All those things would come into play. Right now, there are big shifts in the economy. Everything is changing, and there is a lot of uncertainty, even for economists. It's hard to know whether inflation is going up, it's coming down, is the economy getting better, is it getting worse? That's why we've decided to start a new show, to sit down with different economists, industry experts, and CEOs, to find out what's happening in the economy, financial markets, the housing market, so that you can make better decisions for your financial future. I'm Siamak Khorami, and this show will be called Market Insider. We have a number of interviews out, and we're getting great reception. Make sure to check them out. There is a link below. We'll see you there. There is a thought out there that these billionaires, the wealthiest of the society, especially with the K-shaped economy and rich getting richer, poor getting poorer, and big gap, they're not paying enough of their share. What are your thoughts? And this is going to help do that, they're paying. Yeah, first, I have no idea what fair share is. But if you look at the four major players, they own a piece of paper that says they're worth a lot of money. But for the most part, yes, they live great, but you only have so many steaks in an evening. I don't know what fair share is. But I don't think it's any different to look at these ultra wealthy people and say they're not paying enough in taxes than to just stand on the street corner and stop everybody who's driving a brand new Porsche or that Tesla truck and say, you know, if you drove a Ford Escape, people would be better. So I don't have a definition for fair share. Almost all of these people, in at least the top numbers that you can see are very philanthropic. My guess is, and it's not really the question you ask, how will they pay? You know, will they reduce their philanthropy to pay for this tax? My answer is probably yes. You know, that will impact their liquidity. But to the question of fair share, I don't think anybody knows the answer to that. Hank Adler, professor of accounting at Chapman and also his former CPA, it was great to have you on California Insider. Always good to be here. Tell us what you think about this proposal. Do you think this is good for California or do you think it will hurt us in the long run? You can always email us at ciamacacaliforniansider.com or comment. We read all of your emails and comments. I'm Ciamac Orami, this is California Insider. We'll see you next time.