Exit Taxes Won’t Save Failing States

Some state lawmakers are focused on making leaving costly, while ignoring the reforms that could make staying attractive.

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Commentary

When a state starts floating an exit tax, it is telling you something more important than any campaign slogan: The people running the place know that their model is not working.

They may not say it that way. They will call it fairness, responsibility, or making the wealthy “pay what they owe.” But the meaning is the same.

If families, entrepreneurs, and investors are leaving, the state can either ask why its policies are pushing them out, or it can try to tax them for escaping. An exit tax chooses punishment over reform.

I understand why these proposals resonate with some people. If you are watching wealthy residents relocate while governments still face bills for schools, roads, pensions, and other commitments, it is easy to feel like the people with the most mobility are ducking the tab.

That frustration is real. It deserves a serious answer. But an exit tax is not a serious answer. It is a confession that lawmakers would rather cling to a failing fiscal model than fix the spending, regulation, and tax policies that made people want to leave in the first place.

That is why the current trend is so revealing. In California, proposals have centered on taxing billionaires’ net worth, including wealth that often exists on paper rather than in cash. In New York, the push has extended to a new surcharge on high-value second homes in New York City.

In Washington state, lawmakers have already enacted a “millionaires’ tax.” These policies differ in form, but not in spirit. They all send the same message: If government has made your state too expensive, too hostile, or too unpredictable, it may still try to claim part of your future anyway.

The economics are worse than the politics. Supporters talk as if wealth is a pile of idle cash sitting in a vault, just waiting to be skimmed. It is not. Wealth is usually tied up in businesses, shares, property, and future earnings.

Taxing net worth or unrealized gains means taxing value that often has not been sold, realized, or converted into cash. That can force asset sales, dilute business ownership, weaken investment, and change behavior long before the tax collector ever gets a check.

A Hoover Institution analysis of California’s proposal found that once likely migration responses are considered, the measure could leave the state with a negative net present value of about $25 billion. That is the real lesson: Politicians score the tax statically, but the economy does not sit still.

And that is before you get to the broader evidence. The Organisation for Economic Co-operation and Development has noted that recurring net wealth taxes have become much less common across advanced economies because they tend to raise less revenue than promised while creating large compliance costs, avoidance incentives, and economic distortions. Countries tried them. Many backed away.

A recent National Bureau of Economic Research study on Scandinavian wealth taxation found that higher top wealth-tax rates reduced the number of wealthy taxpayers and that many of those taxpayers were business owners whose departure reduced investment, employment, and value added.

That is the part too often ignored in political talking points. When a state drives out a founder, investor, or employer, it is not just losing one tax return. It is losing future jobs, future capital formation, and future opportunity for everybody else, too.

Defenders of exit taxes still fall back on one argument that sounds morally satisfying: These taxpayers benefited from state infrastructure, legal protections, and markets while they lived there, so the state deserves one final cut.

But that argument quietly rewrites the relationship between citizen and government. It turns moving into a taxable offense. It says the state retains a lingering claim on your success because you once lived under its jurisdiction. That is a dangerous principle in a federal system built on mobility and competition.

Even in the international arena, exit taxes are controversial, complex, and tied to specific movements of assets or functions across borders. Importing that logic into state tax policy is not modernization. It is escalation.

The problem is not just that these taxes are bad economics. It is that they usually do not stay narrow. Politicians sell them as a tool aimed only at billionaires or luxury homeowners—policy aimed at an applause line. But when the revenue falls short, the scope expands.

One-time wealth taxes become annual property surcharges. “Billionaire” thresholds are expanded to target millionaires and eventually the middle class. “Temporary” taxes become permanent fiscal architecture. New York’s pied-à-terre proposal is a good example of how quickly the logic expands once the principle is accepted.

French economist Frédéric Bastiat warned us to look not just at what is seen, but at what is unseen. We see the tax revenues. That’s a small, visible victory compared with the investment that never happens, the entrepreneur who builds elsewhere, jobs that never arrive—the unseen costs compound.

Exit taxes are built on ignoring all of that.

Claiming an exit tax frames mobility as theft, when it is often a rational response to bad governance. They do not restore prosperity. They steal the opportunity to prosper by doubling down on the very policies that made growth harder in the first place.

If lawmakers want to deter departures, the answer is not a fiscal trap door. It is better policy: lower taxes, lighter regulation, spending restraint, and a serious effort to make their states places where productive people want to stay.

Real economic renewal is more difficult than yet more taxation, but it is also the only approach that works. Exit taxes will not save failing states. They only confirm why people wanted to leave.

Reprinted from The Daily Economy, a publication of the American Institute for Economic Research