California tax fight spotlights how billionaires escape taxes

As wealthy donors commit at least $35 million to defeating California’s proposed 5% tax on billionaires, the escalating campaign is focusing attention on how much of the nation’s largest fortunes go untaxed each year.

The measure would apply to residents whose wealth is largely held in appreciated stock and other assets that are not subject to annual income tax unless sold. The clash comes as Federal Reserve data show the top 1% now control a record 32% of U.S. wealth.

The initiative, backed by Service Employees International Union-United Healthcare Workers West and St. John’s Community Health, would tax the 2025 net worth of billionaires residing in California at 5%, with 90% of the revenue directed to health care and 10% to K-12 education. Supporters say the measure is needed to offset billions of dollars in projected shortfalls tied to federal Medicaid cuts. At a rally in Los Angeles on Wednesday, Vermont Senator Bernie Sanders framed the effort as a response to concentrated wealth, saying, “The billionaire class no longer sees itself as part of American society.”

A committee backed by Google cofounder Sergey Brin has raised $35 million to support rival ballot initiatives designed to block or weaken the proposal. Cryptocurrency executive Chris Larsen contributed $5 million this week, while Peter Thiel sent $3 million to a lobbying group opposing it. Abby Lunardini, a spokesperson for the Brin-backed committee, said in a statement, “California is the world’s fourth-largest economy and a global center of innovation. Yet, for decades, it has become increasingly hard for working families and businesses to live, grow, and thrive here.”

The state-level fight reflects a national tax structure that treats income and wealth differently. While the top 1% of earners pay roughly 40% of federal income taxes, much of billionaire wealth consists of unrealized gains that generate no tax liability until assets are sold. A working paper from the National Bureau of Economic Research found that the 400 wealthiest Americans faced an effective tax rate of 24%, compared with 45% for top labor income earners.

Billionaires often receive compensation in stock and borrow against appreciated assets rather than selling and triggering capital gains taxes. Moody’s Analytics reports that the wealthiest 20% of households now account for nearly 60% of personal consumption, up from about 50% in the early 1990s. “As long as they keep spending, the economy should avoid recession. But if they turn cautious for any reason, the economy will face serious problems,” said Mark Zandi, chief economist at Moody’s Analytics.