The California Wealth Tax Failed — And Everyone's Getting Why Backwards

California voters defeated the proposed one-time 5% tax on the net wealth of roughly 200 to 250 residents worth more than $1 billion, but the episode left the policy debate unresolved. Adam Conover said before the result that he would vote yes on Proposition 40, while warning that passage could nationalize a bad idea and worsen the economy. He argued the tax was unlikely to raise revenue effectively, and would make more sense if its purpose were to punish wealthy people and drive them away. Supporters estimated it could raise about $100 billion for healthcare; critics said a one-time windfall could not reliably cover recurring costs.

Supporters framed the measure as a response to possible healthcare cuts, including an estimated $30 billion reduction in federal healthcare funding for California, coverage losses for about 2.2 million people, and a doubling of the state’s uninsured rate by 2030. Conover said the federal bill could affect healthcare for more than 70 million Americans. One estimate held that the tax’s proceeds might cover California’s healthcare gap for about 10 years, but expanded coverage could use the money faster, while persistent budget pressures might prompt repeat taxes. The proposal would count assets such as real estate and stock portfolios, not only cash.

A speaker argued that the measure’s retroactive start date had already encouraged wealthy Californians to leave, taking some companies with them, and estimated that about $1 trillion in net worth had left the state. The speaker warned the resulting lost revenue could total hundreds of billions of dollars or more over decades. That claim sits alongside the measure’s supporters’ concern that healthcare cuts could leave millions without coverage; the discussion did not establish that either the estimated departures or their long-term fiscal effects were certain. The central trade-off was immediate funding for healthcare against the possibility of a shrinking tax base and recurring revenue needs.

The discussion also questioned whether more healthcare funding would fix the underlying cost problem. One speaker cited U.S. healthcare spending of $5.7 trillion in 2025, employer family coverage costing more than $28,000 a year, and a 9% rise in workers’ costs in one year. Hospital prices, the speaker said, tripled between 2000 and 2023, while employer plans paid hospitals 254% of Medicare rates for the same service in the same building. The speaker also noted that the United States had fewer doctors, nurses, and hospital beds per person than a typical rich country, arguing that high spending did not necessarily produce more capacity.

The speaker traced some cost incentives to employer-based insurance, which expanded as wartime wage freezes pushed employers to compete through benefits; Congress made the tax-favored treatment of employer health benefits permanent in 1954. Excluding employer-paid insurance from taxable income, the speaker argued, encourages coverage that makes it harder for patients to compare prices. Insurers may also earn more when premiums rise because overhead and profit are tied to a share of premiums, while claims administrators for self-insured employers may have little incentive to bargain down hospital costs. The discussion acknowledged a countervailing argument: competition for employees can motivate companies to offer better healthcare, and weakening that incentive could reduce pressure to improve care.

Evidence on wealthy households challenged the claim that they mainly finance their lives by borrowing against stock. Edward Fox and Zachary Liskow analyzed two decades of Federal Reserve household data for top-1% households worth at least $14 million and found annual new borrowing of 1% to 2% of economic income, compared with unrealized gains 20 to 40 times larger. One speaker described the more typical pattern as “buy, save, die”: households earn taxable income, spend some, and save the rest. Borrowing against volatile assets also creates risks, including margin calls or lenders withdrawing loans when collateral falls. The speaker said 32 Forbes 400 members had pledged public stock as loan collateral, with Elon Musk accounting for 47% of the pledged value, and cited quarterly turnover of loans to wealthy borrowers as high as 30%.

The proposed tax would have applied to net worth, assets minus debt, so borrowing against shares would reduce the tax base rather than make wealth disappear from it. As an alternative to a step-up in basis at death, the speaker proposed carrying the giver’s tax basis over to heirs, who would owe tax on gains if they later sold, but not simply because they inherited the assets. The broader argument was that inequality can fuel frustration, yet durable relief from healthcare costs may require changing incentives so businesses can profit by lowering costs, rather than relying only on more funding, regulation, or single-payer coverage.