California’s unicorns – startups valued at over $1 billion – are an essential part of the state’s business ecosystem. But adopting the California Billionaire Tax Act, also known as Proposition 40, could make the state’s startup culture far less magical.
By signaling that wealth taxes are part of the state’s revenue toolkit, the ostensibly one-time tax would force the next round of entrepreneurs to think long and hard about starting businesses in the Golden State.
Companies have long time horizons. A future founder deciding among San Francisco, Austin, Miami and Phoenix is not just interested in today’s tax burdens, but what taxes are likely to be years from now, when a company might be worth billions.
The prospect of a wealth tax is particularly alarming for founders because wealth taxes are imposed without regard to profitability. A startup that spends years reinvesting its earnings to grow market share may have significant book value but no profits.
Founders don’t want to be forced to liquidate a portion of their ownership stake to pay the tax bill, particularly if the company is pre-IPO. And they certainly don’t want the state to functionally claim a percentage stake in the value of their growing business to satisfy a tax liability.
Venture capitalists are likely to factor a California location into their investment analysis if voters prove amenable to a wealth tax, discounting valuations for California startups due to greater tax risk. Investors may also push founders to relocate before valuations rise, and they would be incentivized to favor investments in companies where founders are less likely to face forced dilution.
None of this means California would lose all of its future startups. Silicon Valley still has a great deal to offer. But the risk of a future, potentially permanent, wealth tax makes it more costly to start a business in California and raises the cost of investment, since VC firms will demand higher returns to compensate for increased tax uncertainty.
The even greater concern is the network effect. Tech startups locate in California largely because of agglomeration — new tech companies benefit from being co-located with other tech companies. Silicon Valley persists not because of anything intrinsic to the Bay Area, but because it’s where so many key companies are already located.
Agglomeration effects have been weakening for years. Greater mobility, remote work and enhanced tech infrastructure have spurred Silicon clones — Silicon Hills, Silicon Prairie, Silicon Alley, Silicon Slopes. Silicon Valley still has a draw, but it weakens every time a successful tech company establishes itself somewhere else. If the threat of future wealth taxes incentivizes some founders to look elsewhere, their success could draw away additional startups beyond the direct tax response itself.
A one-time tax can have a permanent effect if it changes what founders and investors believe the state will do the next time it faces a budget shortfall. The current proposal already has some existing billionaires heading for the exits, but the greater danger may be the loss of future founders who never establish their businesses in California in the first place.
California’s economy is heavily reliant on outliers — big risks that yield even bigger rewards. A wealth tax aimed at yesterday’s outliers changes the expected return for those taking risks tomorrow. Adopting a wealth tax in 2026 is a good way to ensure that some of those future innovators get their big break in other states.
Jared Walczak is president of Walczak Policy Consulting, a visiting fellow at the California Tax Foundation and a senior fellow at the Tax Foundation.