Rep. Ro Khanna, D-Calif., has proposed a novel approach for billionaires to pay California's proposed wealth tax, Proposition 40: the state would lend them the money. This plan, which has drawn significant debate, would require wealthy individuals to pledge company shares as collateral for loans covering their tax liability. The loan would need to be repaid within roughly a decade, or the state government could seize the pledged shares.
Critics argue that this proposal fundamentally alters the nature of the tax from a revenue-generating measure to a form of compulsory state ownership of businesses. Mark Cuban, a billionaire entrepreneur, has stated that such a measure would encourage founders and investors to leave California to avoid being forced into large loans or relinquishing control of their companies. He indicated he would advise founders against investing in the state if Proposition 40 passes.
Concerns have been raised about the potential for successful entrepreneurs, even those not yet officially declared billionaires, to relocate from California preemptively to avoid future tax implications. The argument is that individuals who are successful in the business world, along with their legal and financial advisors, begin planning for financial risks years in advance. This could lead to a situation where the very individuals whose wealth California hopes to tax are the ones most likely to leave the state.
Furthermore, the state could face the risk of acquiring ownership of companies that may become worthless in the future if founders cannot repay their loans. This scenario suggests the state would bear the downside risk associated with the tax liability while having limited potential for upside gain.
The ostensible goal of Proposition 40 is to generate revenue for healthcare services. However, critics point out that if the state lends a founder $50 million to pay a $50 million tax bill, the net cash revenue to California in the first year would be zero, as the state would effectively be using its own funds to pay itself. This would provide no immediate cash for healthcare.
Research from Hoover Institution colleagues suggests that billionaires have already moved nearly 30% of the wealth targeted by the proposed tax out of California. These researchers also estimate that the tax would generate approximately $40 billion, rather than the $100 billion projected by proponents. The analysis further indicates that California could lose significant future income tax revenue from departing billionaires, potentially making the wealth tax a net financial cost to the state. Billionaires in California currently contribute an estimated $3.3 billion to $5.8 billion annually in state income taxes.
Khanna's proposal and his evolving political stance have been characterized by some as a shift towards a more progressive or socialist platform, a departure from his previous alignment with Silicon Valley Democrats. The author of the source material contends that California's move into venture lending for billionaires is an unusual form of socialism that is likely to fail.