The celebration of Democrats is on hold after the election results. Joe Biden and Kamala Harris are headed to the White House, but defeats in both chambers of Congress slowed the extreme agenda of packing the Supreme Court, adding new states to the union, and the prospect of a confiscatory wealth tax. Unforeseen losses for Democrats in Congress and state legislatures will most likely mean that radical policy prescriptions will be only possible at the local level.
That’s what happened in San Francisco, where voters recently passed a sweeping wealth tax far beyond efforts at the state or federal level. Proponents of the tax describe it as an “overpaid executive tax”: Companies that operate in the city and pay their executives more than 100 times the median employee’s salary will pay a tax ranging between 0.1 percent and 0.6 percent. While decisions regarding tax hikes are better left to local voters, rather than bureaucrats in Sacramento or DC, San Francisco’s new wealth tax could create unintended negative consequences, including a significant exodus of high-earners out of the city.
The Bay Area is home to California’s largest income gap. Residents in the area’s 90th percentile earned 12.2 times more than those in the bottom 10th percentile. The top 5 percent of San Francisco County households earns $808,105 — a stunningly higher figure than the $16,184 of the bottom quintile. A unique combination of California’s increasingly-distant past as a market-friendly state, and its current socialist policies of high taxation and constraining housing policies, created this stark separation of classes. The success of Big Tech combined with high taxes, regulations, and building restrictions leads to a situation where a person could earn over $100,000 per year and live in his or her car.
The new wealth tax could not come at a worse time. Facing COVID-related restrictions and the resulting economic slump, the SF Gate reported on a “mad dash” for the wealthy to leave the city. The number of houses on the market doubled from last year. It got so bad that the SF Gate hired a “Bay Area exodus” reporter, who then left the area herself. Similar fiscal moves in the city, including a doubling of the transfer tax on high-value real estate and a sharp increase in business taxes, will only further accelerate the exodus.
Recent and historical examples suggest higher taxes would likely only reduce the gap between rich and poor by chasing the wealthy away. The emigration catastrophe affecting the city will accelerate as it becomes remarkably difficult to own property or run a business in San Francisco. There’s already a steady stream of large companies considering moving from the city altogether. Tesla is likely headed out from the Bay Area, so are several venture capital firms, the CEO of Dropbox, as well as tech employees from Google, Twitter, and beyond. When corporations feel no longer welcome and have a remote-working fig leaf to disperse their employees, the results will be obvious and far reaching.
The ripple effects of the new tax could also hurt blue collar workers and service sector employees in the long run. Tax revenue for basic services, social programs, and infrastructure will be hollowed out if high-earners continue to flee. The wealthy will simply bring their capital elsewhere; they will go where the jobs are or create them someplace else. This may bring advantages for employees in Denver or Austin, to the detriment of low and middle-income workers in San Francisco.
The city’s leaders would be wise to learn from the experiences of similar tax schemes. France finally overturned its wealth tax in 2017, after finding that it chased out 42,000 millionaires from the country between 2000 and 2012. Indeed, across Europe, the model of a wealth tax has been mostly phased out or severely debilitated by loopholes. Closer to home, New York City’s exorbitant state and local tax rates sparked an even larger exodus earlier this year.Some wealthy neighborhoods saw up to 40 percent of their residents flee, along with their $300 billion in combined wealth.
There are other solutions to help close San Francisco’s wealth and income gaps. The state and local tax deduction limit is one of the major means to even the playing field between the wealthy without raising the statutory income tax. When the city is faced with a litter of needles, rapidly rising crime, and stresses of the pandemic, new punitive taxes may be the signal for the city’s earning elite that it is no longer wealthy. And for a region that is so prideful of and dependent on, its big tech companies, the recent ballot initiatives may soon spark a demographic disaster of the first order.
Kristin Tate is a libertarian author and an analyst for Young Americans for Liberty. She is a Robert Novak journalism fellow at the Fund for American Studies. Her newest book is “The Liberal Invasion of Red State America.”