The Tax That Eats Its Own

California’s Billionaire Tax isn’t redistribution. It's destruction.

"It's not personal. It's strictly business." — Michael Corleone, The Godfather (1972)

California wants to tax wealth that doesn’t exist yet.

The Billionaires Income Tax Act, headed for the November 2026 ballot, would impose a one-time 5% levy on fortunes exceeding $1 billion. Not on income. Not on realized gains. On paper. On theoretical value. On companies that haven’t been sold, shares that haven’t been liquidated, futures that haven’t arrived.

A founder worth $2 billion on paper might have $50,000 in checking. Under BIT, they’d owe $100 million in cash.

The math doesn’t work unless you force liquidation. That’s exactly what would happen.

At Sugar Capital, we see this constantly. A founder raises a Series B at a $500 million valuation. On paper, their stake is worth $200 million. In practice, they’re taking a modest salary, reinvesting everything, hoping the next 18 months go right. These aren’t people hoarding wealth. They’re building the companies that generate the tax revenue California actually depends on.

The BIT Act treats illiquidity as a technicality. It isn’t. Illiquidity is the entire architecture of startup economics. Founders accept below-market pay because equity might be worth something someday. Investors lock up capital for a decade. The system runs on deferred gratification.

Now tell a founder California will tax their unrealized gains before any exit. Before liquidity. Before they know whether the company survives.

The rational response isn’t to pay.

The rational response is to leave.

A friend of mine spent a decade building one of the most successful investment firms in the country. Created thousands of jobs. Paid billions in taxes. He left California on December 31st. No press statement. No thread. Just gone.

Palmer Luckey built Oculus, sold it to Facebook, paid his taxes, then started Anduril. Six thousand employees. Real defense technology built in California. He’s been explicit: BIT would force founders to liquidate chunks of their companies just to satisfy Sacramento. Joe Lonsdale, who co-founded Palantir and now runs 8VC, called the proposal “unethical, unconstitutional, and un-American.” He’s already in Austin.

Europe already ran this experiment. The results aren’t ambiguous.

France had a wealth tax for three decades. It lost 42,000 millionaires. Revenue was negligible, less than 0.2% of GDP. The tax was repealed in 2017. Sweden killed its wealth tax in 2007 after watching IKEA’s Ingvar Kamprad leave. Norway kept its tax and paid the price. Thirty billionaires fled in 2022 alone. One hundred five of the country’s 400 richest have since relocated or restructured.

Three countries. Three decades. One lesson.

Capital moves faster than legislation.

The BIT Act’s authors tried to get clever. The tax applies to anyone worth over $1 billion who was a California resident on January 1, 2026, even if they leave before the vote. A retroactive trap designed to prevent flight.

But billionaires have lawyers. And lawyers have calendars.

The exodus has already begun. The initiative itself is the trigger. What remains is everyone else.

California’s top 0.5% of earners pay roughly 40% of state income tax. Drive them out, and the middle class inherits the bill. That’s not politics. That’s math.

The deeper problem is what BIT signals. The state that built Silicon Valley is now telling founders their success will be taxed before it’s realized. Not after an IPO. Not after a sale. Before. That signal travels. Angel investors and LPs, the people who write the first checks, are watching. Y Combinator CEO Garry Tan put it plainly: this isn’t a billionaire tax. It’s a destroy-tech-in-California proposition.

Sir Michael Moritz, the Sequoia partner who backed Google and PayPal, and an early investor in POPSUGAR, made the same case in the Financial Times. People like him will be fine. They can pay or leave. It’s everyone else who inherits the bill.

Governor Gavin Newsom has come out against the measure. When the most progressive governor in a generation backs away from a wealth tax, that’s not ideology. That’s pattern recognition.

At Sugar Capital, we’re not billionaires. We’re fiduciaries working to generate returns for our LPs. We depend on an ecosystem where founders can build and exit without being taxed into liquidation before they cross the finish line.

BIT doesn’t just threaten billionaires. It threatens the system that creates them.

Lose the billionaires, you lose the angels.

Lose the angels, you lose the founders.

Lose the founders, you lose the companies.

Lose the companies, you lose the future.

This is a chain reaction, not a policy debate.

France tried this. Reversed course. Sweden tried this. Reversed course. Norway is trying it now. The exits are accelerating.

Every country that has taxed wealth this way has either reversed course or paid the price.

California thinks it will be different.

It won’t.