seeks to target billionaires’ balance sheets, but it largely overlooks the manner in which many ultra-wealthy individuals actually generate spendable cash: they borrow against their assets tax-free and never “realize” income in the first place. As long as that borrowing model remains in place, a one-time levy on wealth may raise money once, but it does little to transform the system that allows cash-poor billionaires to live luxuriously while reporting very little taxable income.
California is contemplating a ballot measure, the Billionaire Tax Act, which would impose a one-time 5% tax on the total assets of state residents worth $1 billion or more. The tax would apply to anyone who was a California resident on January 1, 2026, with payment due in 2027 and the option to extend it over five years for an additional charge.
Supporters, led by a , present the measure as a means to raise approximately $100 billion to offset expected federal healthcare cuts and compel the wealthy to pay what they term their “fair share.” Gov. Gavin Newsom has cautioned that the levy could backfire by accelerating the departure of high-net-worth residents, even as he continues to defend the state’s broader progressive tax system.
To bring this example from the theoretical to the practical, consider the examples of Elon Musk, the world’s richest man, and Mr. Beast, the world’s most popular YouTuber. Musk does not live on a normal “salary” like most people, with most of his wealth tied up in shares of his companies such as and , and he typically borrows against those holdings and occasionally sells stock. In that sense, he is extremely asset-rich but relatively low on ordinary cash income, using large credit lines backed by his equity to pay for homes, jets, and other expenses instead of taking regular paychecks.
Mr. Beast, meanwhile, recently stated that he has “negative money right now … “I’m borrowing money right now — that’s how little money I have.” While he isn’t the CEO of a publicly traded company like many of the California billionaires targeted by this proposed tax, Mr. Beast, or Jimmy , is , he explained, leaving very little in his bank account.
pointed out this tension in a with Rep. Ro Khanna, who supports the billionaire tax. “You are fighting to force founders like me to sell huge chunks of our companies to pay for fraud, waste, and political favors for the organizations pushing this ballot initiative,” Luckey wrote, noting that the tax would create more problems than it would solve. Other executives voted with their feet, with the guys bidding farewell to California, , as Larry Page and Sergey Brin both moved to sever ties, Page with a centered on trophy properties in Miami. Here’s why Luckey has a point that this tax is targeting the wrong aspects, and the peculiar reason these billionaires don’t actually have much cash on hand.
The ‘Buy-Borrow-Die’ reality
The underlying problem lies in how modern billionaires convert paper wealth into cash without showing much taxable income. Instead of selling stock or private-company shares and realizing capital gains, they pledge those assets as collateral, borrow against them, and use the loan proceeds to fund everything from yachts and mansions to new investments.
Because , these loans incur no income-tax bill, even when they finance lavish lifestyles. Policy analysts often describe this as the “” strategy: buy appreciating assets, borrow against them to live, then have heirs inherit those assets with a stepped-up basis after death, erasing much of the embedded tax liability.
Under U.S. tax law, loan proceeds are not treated as income because they must be repaid, so they are not taxed when received. If a billionaire borrows against appreciated stock or real estate instead of selling it, there is no sale, so no capital gain is realized and no capital gains tax is triggered.
It works like this:
- Step 1 – Buy: They acquire assets expected to appreciate over time (founder stock, real estate, private businesses) and hold them for decades, allowing gains to accumulate untaxed as “unrealized” gains.
- Step 2 – Borrow: They pledge those assets as collateral for large credit lines or loans (e.g., margin loans, securities-backed lines of credit, loans against real estate) and live or invest using that borrowed cash instead of selling.
- Step 3 – Die: When they die, heirs get a “step-up in basis,” meaning the tax cost basis resets to current market value, eliminating the built-up unrealized gain for income-tax purposes.
Why a One-Time Wealth Tax Misses
California’s own fiscal watchdogs have noted that many top earners already avoid large state income taxes by borrowing against appreciated stock instead of selling it. A one-time 5% charge on net worth would hit that accumulated wealth once, but wouldn’t affect the ongoing flow of tax-free cash from asset-backed borrowing. As Luckey notes, it would force these billionaires to liquidate assets to come up with the cash required by the law, making leaving California an easier option for those who can do it—and billionaires can do it.
Critics warn the proposal could encourage more billionaires to leave without permanently changing their incentives to realize income or pay taxes where they actually live. Venture capitalist that about $1 trillion in billionaire wealth has already left California amid the tax fight, raising the risk that the state loses future income-tax revenue while capturing only a single extraordinary amount.
Solving the real problem
argues that if policymakers want to reach the cash-poor, asset-rich class, they must tax the proceeds of wealth, not just the stock of it at a moment in time. Proposals include state-level “wealth proceeds” taxes that more comprehensively tax capital gains and investment income, and reforms to reduce the bias favoring borrowing over selling appreciated assets. and , law professors at the University of Michigan and Yale, respectively, have suggested a way to close the “billionaire borrowing loophole” by changing the law so that borrowing is treated as income.
Without such structural changes, California’s wealth tax risks being a dramatic, politically appealing gesture that leaves the core architecture of billionaire tax avoidance—and the tax-free loans that support it—largely intact. And it would seemingly leave California with far fewer billionaires.
For this story, journalists used generative AI as a research tool. An editor verified the accuracy of the information before publishing.