The political peril of California's billionaire tax

Catch up quick: Rep. Ro Khanna (D-Calif.) recently endorsed a proposed wealth tax on California billionaires, which could be on the state's ballot this November.

• If approved by voters, the measure would apply a one-time 5% tax on billionaires residing in the state as of last Thursday, payable in 2027. Payments also could be spread out over five years, but with added interest.
• Proceeds would be put into a dedicated account, the vast majority of which would be earmarked for health care.
• The measure was written by state labor unions, and is opposed by Gov. Gavin Newsom.

The big picture: Khanna's support unleashed a flood of condemnation from tech founders and investors, including talk of finding and funding a rival candidate.

• A lot of the backlash was just about the rich wanting to retain their riches, with some accusing Khanna of endorsing "tyranny."
• Others argued that California shouldn't increase any taxes until it becomes more fiscally responsible.

Zoom in: The deeper disagreements, however, were on how such a wealth tax would actually work — namely in that it would seem to apply to unrealized capital gains. If you're having 2024 flashbacks, you're not alone.

• In short, this would be a major philosophical shift in U.S. tax policy, if even in just one state. Massachusetts, for example, has a "millionaire's tax" — but it only applies to real income — not paper wealth.

Khanna says he supports workarounds for startup founders with illiquid stock, but hasn't yet put meat on that bone.

• For example, what if there's an active secondary market for shares, or the startup has enough investor interest to execute a tender? Would the workaround be an exclusion, deferral, or something else?
• Khanna tells Axios that he's setting up meetings with tech leaders like Netflix co-founder Reed Hastings and LinkedIn co-founder Reid Hoffman, plus labor leaders, to work out such details.

• One possibility is that the tax calculations wouldn't include shares of an unprofitable company within 10 years of its founding.
• "Key is making sure the innovation miracle of Silicon Valley continues while also making sure that the working class benefits from this prosperity," Khanna says.
• He also supports the creation of a tax on large personal loans based on stock value above the cost basis, which could get at "buy, borrow, and die" strategies, although he doesn't believe it would generate as much revenue as would the billionaire's tax.

The bottom line: Khanna believes that slightly reducing income inequality could help millions of citizens obtain better health care, but hasn't yet figured out how to thread the policy needle.

• If he does so, it could provide a model for other politicians of both parties. If not, it could become a warning against trying.