Silicon Valley Rep. Ro Khanna stood up to his billionaire donors last December when he endorsed a ballot initiative that would impose a one-time 5% tax on the net worth of state residents with more than $1 billion in wealth.
“It’s a matter of values,” he said. “We believe billionaires can pay a modest wealth tax so working-class Californians have the Medicaid.”
His endorsement revealed his political values — the right ones.
The measure, championed by the SEIU-United Healthcare Workers West, asks the wealthiest Californians to contribute a fraction of their wealth so the state can protect working families. That is the rich paying their share.
The tax will reach private startup founders whose wealth mostly sits in illiquid shares. The initiative already lets them spread the payment over five years at a fair interest charge, and to defer payment until they monetize their stake.
As the Tax Foundation explains, the state would then become “a co-investor in the assets” — meaning the public shares in the upside of California’s most successful companies. If the shares appreciate, “California can tax the additional accumulated wealth even if the taxpayer has long since left the state.” The state’s claim on wealth its public services helped generate does not end at the state line.
Last weekend on social media, Mr. Khanna floated another idea. “Allow illiquid founders to pledge shares with a loan from the government to pay tax,” he wrote. “The loan period is long but not infinite (e.g. 10 years)” and “at the end of the period, the loan is either paid back in cash, or the government assumes the shares.”
Hedge fund manager Bill Ackman wrote that a founder could still owe tax if he takes out a loan against his shares from the state and if the company fails. Mr. Khanna later acknowledged as much: “If the shares go to zero the founder can still face capital gains tax on the deemed sale (basis is often near zero),” he said. “That’s a real issue.”
It is a real issue.
A more telling problem: the state would be lending money to billionaires to pay itself. As Mark Cuban asked, if the state doesn’t receive any incremental revenue, “what’s the point of that?”
The state should collect the tax and stop subsidizing the wealthy to pay their own bill.
What happens if a founder can’t pay back the loan in 10 years? The government would then take the shares — recovering the tax owed, just as any secured lender would.
“I’m sure the investors in those companies will be thrilled about their new partners,” Mr. Cuban wryly noted.
The companies these founders built, on California’s workers, infrastructure, courts, and public universities, owe something back to the state that made their success possible.
Palmer Luckey, who co-founded the defense tech startup Anduril Industries, observed that founders would have a 10-year window to pay back their loans — or else surrender their shares to the government. That is the accountability investors should welcome: companies should be required to create real value, not paper wealth, to escape the tax.
“We only need this money because the Trump administration cut $30 billion to our Medicaid program,” Mr. Khanna wrote. “If folks hadn’t supported Trump and his medicaid cuts, maybe we wouldn’t need this.”
California’s federal Medicaid payments have increased 14% ($16.4 billion) over the last year. The state needs the money.
The threat that the wealthy will flee California over a 5% wealth tax is the shakedown the rich have used to kill every progressive tax.
Mr. Khanna is doing a public service by exposing the donor class’s hostility to paying its share.
