Gov. Gavin Newsom of California delivers his State of the State address at the Capitol in Sacramento on Jan. 8.MAX WHITTAKER/The New York Times
Gus Carlson is a U.S.-based columnist for The Globe and Mail.
If you went to business school, you probably remember the Laffer curve, an economic theory floated by Yale economist and U.S. presidential adviser Arthur Laffer that looks at the relationship between taxes and government revenue.
In simple terms, it suggests that raising tax rates beyond a certain point can decrease revenue by disincentivizing work and investment, while cutting rates from a high level can increase revenue by stimulating economic activity. It’s all about finding the right balance.
Last week, California Governor Gavin Newsom had his own Laffer curve moment when he pushed back on a proposed new state wealth tax on billionaires that he said is “really damaging” and “doesn’t make sense” because it is driving them, their businesses, jobs – and tax revenue – out of the state.
The proposed new tax seems to have put the state at the inflection point on Mr. Laffer’s arc, where the higher tax rates would be on track to generate lower revenue, because there would be fewer people to pay them.
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“The evidence is in,” Mr. Newsom said. “The impacts are very real – not just substantive economic impacts in terms of the revenue, but startups, the indirect impacts of people questioning long-term commitments, medium-term commitments. That’s not what we need right now, at a time of so much uncertainty. Quite the contrary.”
Mr. Newsom‘s posture is a remarkable about-face for the progressive Democrat whose tax and spend policies have prompted the flight of companies, capital and people to low-tax states such as Texas and Florida for the last few years. But economic reality, it seems, has trumped political ideology on this point.
The proposed measure, which has labour union support, would impose a one-time 5-per-cent tax on the net worth of California residents with assets of more than US$1-billion. The tax would be due in 2027 and taxpayers could spread payments over five years.
Many billionaire business owners aren’t waiting around to find out if the proposal makes it into law. Google co-founder Larry Page moved several business entities out of the state in December. He also reportedly bought two Miami properties valued at a combined US$173.4-million.
Google co-founder Sergey Brin and venture capitalist Peter Thiel, co-founder and chair of Palantir, have shifted some business operations out of California, as well. Oracle moved out of the state in 2020 and its co-founder, executive chair and former chief executive Larry Ellison sold his San Francisco mansion for US$45-million last year.
In California, where the state’s 8.8-per-cent corporate tax rate is among the highest in the U.S., the flight of both capital and jobs has been significant. Since 2020, well-known companies such as Tesla, Chevron and Charles Schwab have left.
The exodus in California comes after years of business migration out of other high-tax states such as New York and Illinois.
New York has lost nearly 160 companies to low-tax states in the past five years. Among them are big names in financial services such as Icahn Capital Management, Elliott Management, Alliance Capital and ARK Investment Management, which have taken with them more than a trillion dollars in assets and high-paying jobs.
Illinois has seen a rush of businesses move out of town – many of them iconic names, such as Boeing, Caterpillar, Citadel, Tyson Foods and Morton Salt – amid onerous tax burdens and tight regulation.
Mr. Newsom’s remarkable pushback comes as New York’s new Mayor Zohran Mamdani, a democratic socialist, maps out his early days in office.
In his election campaign, Mr. Mamdani vowed to raise taxes on the wealthy and corporations, a move that many predicted would reopen the floodgates of companies, jobs and tax revenue flowing out of the city and the state.
While he softened his stance somewhat immediately prior to the election, the residual fears among many wealthy New York residents have prompted another wave of migrations. Anecdotal evidence abounds: Realtors in Florida, in particular, have reported a significant uptick in activity from New Yorkers seeking to relocate under the Mamdani administration.
Mr. Mamdani’s supporters say the sabre-rattling among New York’s moneyed set is simply the product of a Chicken Little mindset. The sky is not falling – and will not fall – on New York, the pro-Mamdani forces say.
But Mr. Newsom sees quite a different outcome in a state that is similar to New York in terms of tax policy. From where he sits, the sky will indeed fall if the superrich are punished financially and choose to flee. And that’s a cautionary tale Mr. Mamdani would do well to consider.