A proposed wealth tax in California is causing significant unease in Silicon Valley, prompting concerns that extend beyond the state's existing 5% tax rate. The nervousness stems from the potential impact on founders who hold substantial voting power through dual-class stock structures, even if their actual equity ownership is considerably smaller.

The proposed tax targets voting shares rather than the underlying equity. For example, a founder like Larry Page, who owns approximately 3% of Google but controls roughly 30% of its voting power, would be taxed on that 30% stake. For a company with a valuation in the hundreds of billions, this translates to a substantial tax burden. According to the New York Post, one SpaceX alumni founder building grid technology could face a tax bill at the Series B stage that would effectively eliminate their entire holdings.

This potential tax burden could have a chilling effect on innovation and investment in California. Founders might be incentivized to relocate their companies and personal wealth to states with more favorable tax policies. This exodus could lead to a decline in venture capital funding, job creation, and overall economic activity in the region.

The debate surrounding the wealth tax highlights the complex relationship between taxation and innovation. Proponents of the tax argue that it is a necessary step to address wealth inequality and fund public services. David Gamage, a University of Missouri law professor who helped craft the proposal, believes that Silicon Valley is overreacting and suggests founders consult with tax lawyers to explore options such as deferral accounts. These accounts would allow founders to defer taxes on assets they do not want taxed immediately, with California instead taking 5% whenever those shares are eventually sold.

The future of the wealth tax proposal remains uncertain. However, the debate has already sparked a broader conversation about the role of taxation in fostering a vibrant and competitive tech ecosystem. The outcome will likely shape the future of Silicon Valley and its position as a global hub for innovation.