Why California's Wealth Tax Will Make Everyone Poorer

If Silicon Valley falls apart, it can't be rebuilt somewhere else.

Courtesy Maarten van den Heuvel/Unsplash.

If the proposal secures enough signatures to appear on the ballot, Californians may be asked to consider the 2026 Billionaire Tax Act this November. If passed, the initiative would impose a “one-time” tax of at least 5 percent on Californians’ personal wealth in excess of $1 billion. The bill’s supporters—the Service Employees International Union and its labor allies—have framed it as a way to fix the state’s budget problems, including a $35-billion structural deficit which might otherwise be filled out of their coffers.

The proposal has provoked fierce opposition, including from numerous state Democrats and the usually union-friendly Governor Gavin Newsom. That’s in large part because the law not only won’t fill the budget hole, but will actively erode the state’s tax base. In expectation of the initiative—which would apply the tax retroactively to billionaires who resided in California as of January 1, 2026—passing, business leaders like Google’s Larry Page and Sergey Brin have already begun leaving. Billionaires generate about a quarter of California’s income-tax revenue; if they walk, they’ll take those dollars with them.

Not everyone is upset, of course. “I will miss them very much,” Rep. Ro Khanna tweeted in reply to news of Page and Peter Thiel’s possible departure. But while Khanna was being sarcastic, his response ought to be genuine. If the state’s tech billionaires flee, not only will California be poorer—all of America will be, too. In fact, the wealth tax could unwittingly dismantle one of America’s greatest strategic assets, making us not just less wealthy, but weaker on the world stage.

California is, by its own estimate, the world’s fourth-largest economy, with a gross domestic product of over $4 trillion per year. Some of that comes from its abundant natural resources, but a lot comes from its major cities. Los Angeles County alone generated nearly $1 trillion in wealth in 2023, while the San Francisco Bay Area produced a whopping $1.2 trillion.

Those figures represent a substantial portion not just of California’s output, but America’s (the GDP of which is about $30 trillion). Moreover, they’re underestimates of San Francisco and L.A.’s true impact on the national economy. The technology produced by Silicon Valley is at the heart of most modern American enterprise, while Los Angeles’s domination of entertainment is a major source of American cultural power. It is not an exaggeration to say that our global-hegemon status depends in significant part on two cities in the Golden State.

But why are these two cities so enormously productive? One answer is simply that a lot of skilled people live there—San Francisco has nearly twice as many residents with a college degree per capita as does the United States, for example. That skill, plus whatever materials they need, equals substantial output.

If that’s true, then moving those people out of California to somewhere else won’t make a difference. If you pick up all of Google’s employees and put them in Texas—where some of California’s billionaires might look to relocate—then one might assume they would be just as productive.

That would be a reason for non-Californians to be relatively sanguine about the wealth tax’s effects. Yes, it will be bad for California fiscally. But the titans of technology and entertainment can just set up shop in a red state and continue their work unabated.

But what if cities themselves have some additive effect? What if there’s something special about Los Angeles or San Francisco per se? What if the specific concentration of human capital in a specific place yields more than the output you’d expect if you put that same capital in a different place?

Source: Bhalothia et al, fig. 6.

As it turns out, that’s exactly what happens. Take recent research from economists at UC San Diego and Northwestern University. They use data on over 500 million LinkedIn users across 220,000 cities worldwide to ask how moving from one city to another affects an employee’s wages (a measure of their productivity). Because they observe the same people moving multiple times, they can disentangle the effects on wages of moving to a given city from the qualities of the people moving between cities.

The results are remarkable. The authors estimate that 93 percent of global wage variation is attributable to city effects, rather than to the qualities of workers themselves. That effect shrinks when you’re talking about movement within the developed world—someone moving from Bangalore to San Francisco gets a bigger wage bump than someone moving from Omaha to San Francisco, for example. But even looking at movers within their own developed country, cities explain something like 30 to 50 percent of the variance in wages.

In other words: it’s not just that people with better skills move to otherwise more desirable cities. Cities themselves make people worth more—meaning that they also increase total productivity and output, and therefore make the economy stronger.

How can it be that where you work is so important for how much you produce? The basic answer is what economists call agglomeration effects, the gains that come when firms cluster together. Agglomeration effects come, in general, from lowered barriers to exchange—of material goods, but also of ideas. Lots of start-up founders move to San Francisco because that’s where they can meet other start-up founders, and be on “the cutting edge” of what’s happening in their field. That’s only possible in a specific physical place.

Even if you put all the start-up founders in the same new part of Texas, moreover, they would still be worse off. Agglomeration economies come also from local culture and supportive industry infrastructure. Los Angeles as a city is built to support entertainers; San Francisco is built to support programmers. If you move those industries to Miami or Austin, neither city will be able to offer the same amenities—which is why both have struggled in their efforts to replace their Californian counterparts.

In other words: if California’s major industries leave California, they can’t be rebuilt somewhere else. Dismantle Silicon Valley, and you can’t just put it back together in Miami. We’ll still have technology companies, sure. But all else equal, they will be less productive than they would have been if they had stayed put. And we’ll all pay the price.

“California is the tentpole of the American economy,” Newsom said in his 2024 state of the state address. He’s right: American economic, military, and cultural might really does depend on the Golden State. Which is why the wealth tax is a threat not just to California, but to America as a whole. If the state drives out its most productive and most capable, then they can’t just rebuild elsewhere—we’ll all just be poorer.