California’s looming capital flight problem could reshape state in 3 key areas

California’s potential “billionaire tax” is the latest catalyst that is driving a capital exodus that puts the state’s tax base, budget and political power at risk.

The measure would levy a one-time 5% wealth tax on residents with more than $1 billion in assets, including unrealized gains — a proposal California Gov. Gavin Newsom has warned could backfire.

Supporters say the tax would close budget gaps, while economists warn that it could weaken long-term revenue.

TAX FIGHT PUTS CALIFORNIA ON COLLISION COURSE AS BILLIONAIRES LEAVE FOR RED STATES

Economists argue the risks are already materializing. Here are three ways that California’s capital exodus will reshape the state.

1. Forcing out the ultra-wealthy deals a major blow to the tax base

Wayne Winegarden, a senior fellow in business and economics at the Pacific Research Institute, warned that the departure of even a few ultra-wealthy taxpayers can have lasting consequences.

“When one of those individuals leaves, that’s a significant and recurring hit to the tax base,” Winegarden told Fox News Digital.

E.J. Antoni, chief economist at the Heritage Foundation, said the proposed wealth tax “has literally never worked anywhere,” warning that capital flight erodes the tax base and shifts the burden onto those who remain.

“The tax base is collapsing, there’s no other way to put it,” Antoni said.

CALIFORNIA WEALTH TAX PROPOSAL HEMORRHAGES $1T AS BILLIONAIRES FLEE

Texas has emerged as a clear winner in the shift toward lower-tax, less-regulated red states, while blue-state leaders grapple with the fiscal and political consequences of capital flight.

Between 2012 and 2022, California recorded a net loss of more than 361,000 residents to Texas, a shift that carried roughly $21 billion in taxable income with it. 

Megan Mauro, interim president and CEO of the Texas Association of Business, said the Lone Star State has seen a surge of new residents from California.

“We have a light regulatory touch and no personal or corporate income tax,” Mauro said, citing Texas’ recent $25 billion surplus as evidence of a different fiscal approach.

She warned the billionaire tax could leave California with fewer taxpayers and less revenue over time.

2. Capital flight pushes budgets in the wrong direction

When it comes to California’s budget, the stakes are especially high.

A relatively small group of top earners supplies a disproportionate share of state income tax revenue, meaning departures at the top can quickly translate into budget shortfalls.

“You’re going to have less revenue,” Winegarden said, warning that slower revenue growth makes it increasingly difficult for states to finance their agenda.

As high-income taxpayers leave, spending pressures don’t necessarily ease, he said, warning that the state will have a hard time financing things like Medi-Cal, California’s Medicaid program. 

3. Population loss could mean fewer congressional seats

Analysts say the migration could reshape political power, affecting congressional representation and federal funding. States that lose population risk fewer seats in Congress, while faster-growing states can gain seats. 

Shifts in population also influence how federal dollars for transportation, health care and education are allocated, since many funding formulas are tied to population size.

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“I think you absolutely get to a point where people are willing to vote differently,” Winegarden said. 

More broadly, Antoni said California could serve as a warning for other states weighing similar policies. 

“California’s decline was not written in stone. It did not have to be this way,” he said.