A California-Style Wealth Tax Would Slash Mass’s Startup Economy

The list of problems surrounding California’s proposed wealth tax keeps growing, with more voices across the political spectrum coming out against the state’s proposal to tax individuals with a net worth exceeding $1 billion. Billionaire entrepreneur and prolific investor Mark Cuban is pointing out new concerns over impacts on the Golden State’s startup economy. That should catch the attention of Massachusetts, since some union leaders say they want to adopt a similar tax here.

Data shows Massachusetts is one of the top destinations in the country for startups, and the state has invested significantly in making the Commonwealth a leader in innovation. But Cuban’s concerns should be a red flag for Massachusetts.

Problem #1 – A Billion-Dollar Company Doesn’t Mean a Founder Has A Billion Dollars

Cuban explains a wealth tax would specifically hurt startup founders whose companies may boost their net worth on paper but don’t have millions of dollars sitting in the bank. For example, shares of a company whose valuation has soared after raising money from investors would count towards a person’s personal wealth. A founder who owns just 10 percent of a company valued at $10 billion could therefore be considered a billionaire by the state, even if nearly all of that wealth exists only on paper.

That could leave founders facing a hefty tax bill without the cash on hand to pay for it. The founder would either have to sell shares of their own company or take out a loan to pay the tax. Who would want to start a successful company in a state where this is required?

Problem #2 – Pushing Founders to Leave

For Cuban, the concern goes beyond how founders would raise the cash to pay the tax. He warned that if the proposal passes, he would ask any startup he was considering investing in to leave California first.

Interviews with several California billionaires suggest some of the state’s wealthiest residents and business owners are already making plans to move at least part of their operations elsewhere. Nearly all of the business owners interviewed said they were planning offices or operations outside California, including lower-tax Florida and Texas.

That could turn a tax aimed at California’s wealthiest residents into a much broader problem. When founders and investors leave, they can take their businesses, investment dollars, and future job growth with them. That could leave the state without a critical source of revenue. Analysts already estimate the migration of wealth out of the state in anticipation of the wealth tax proposal has cost the state roughly $1 trillion.

Problem #3 – Added Debt Burdens for Founders Who Stay

Supporters have proposed a workaround to the cash-flow conundrum described above: a loan from the state. In an exchange on X with Cuban, California Congressman Ro Khanna suggested founders without enough cash to pay the tax could borrow money from the state instead.

But this workaround highlights why taxing the value of a company’s assets rather than actual earnings is a bad idea.

For founders, California’s wealth tax would be based on the value of their shares of the company assessed during the tax period. Due to changes in investors, business cycles, and other external factors, that value may change over time. It also means the company’s value may not be enough to pay back the loan. Khanna indicates that if a declining startup cannot eventually repay the loan in cash, the government would then own company shares instead.

It’s a scheme that would add significant barriers to starting a company in California. As The Washington Post highlights, “If your tax requires the government to start giving out special loans to pay itself, maybe it’s not a good tax in the first place.”

A Warning For Massachusetts

The fallout from California’s proposed wealth tax carries particular significance for Massachusetts. The state punches well above its weight when it comes to producing billion-dollar startups. The Commonwealth produces roughly 15 billion-dollar startups for every one million residents, the second-highest rate in the country behind California, putting the stakes of California’s proposal much closer to home. Similar proposals exported to the Commonwealth could hurt the state’s historical status as home to a robust innovation economy.

Massachusetts is also experiencing its own taxpayer flight trends due to high taxes. High earners in Massachusetts are concerned about the state’s surtax on income over $1 million. Since the tax took effect, IRS data show a growing amount of residents and their income leaving Massachusetts each year.

In a recent survey of people who moved out of Massachusetts, the state’s high tax burden was the top reason pushing them to leave, offering another warning about the risks of giving high earners greater incentives to relocate.

Conclusion

The Commonwealth has built one of the country’s leading innovation economies, supported by entrepreneurs, investors and high-growth companies. Policies that make the state less attractive to the people financing and building those companies therefore risk consequences that extend well beyond the taxpayers directly affected.

As California weighs its next tax experiment, Massachusetts has good reason to pay attention to what follows.