The Accounting Podcast

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Blake Oliver: Is this even constitutional? Because this is a tax that targets basically 200 people in a state of millions and millions and millions of people. And I always had this impression that, like, taxes are supposed to be, uh, you know, generally like equitable or like, you can't just. Can you even could you do that? Could you just pass a law to tax one person.

David Leary: Coming to you [00:00:30] weekly from the OnPay Recording Studio.

Blake Oliver: Hello and welcome back to the Accounting Podcast, your weekly roundup of news in the profession. I'm Blake Oliver.

David Leary: And I'm David Leary.

Blake Oliver: This week we're talking about rogue AI agents, off balance sheet AI financing. And we're going to cover Xerocon 2026, even though neither David or I could make it this year. Sadly, first year I've missed it since it started. Ah! That hurts. Hope [00:01:00] it was fun. Everyone who was there.

David Leary: I got a little FOMO. I was looking at pictures. I got a little FOMO.

Blake Oliver: We've also got an interview with Ben Jarosch from the Hoover Institution about the California billionaire tax. David, you've got a story here about all the accounts receivable on Microsoft's books that are. That's due to AI. That ties into this whole story about this off balance sheet financing, that of all this CapEx investment that's happening in AI data centers, that's not showing up on the books [00:01:30] of all these big tech companies. We'll dig into the nerdy accounting around that, and we'll see what else we get to. But first, David, let's thank our sponsors.

David Leary: Our sponsors this episode are Kanopy, Thomson Reuters on Pay and cloud Accountant staffing. Let me ask you something. How much of your day is spent doing accounting? If you're like most firm owners, 30 to 40% of your time is eaten alive by the work around the work. We're talking, chasing client documents, drafting [00:02:00] the exact same emails over and over again, manual filing and trying to remember what that client said on the last call on last Tuesday. It's an administrative task and it's killing your profitability. That's where canopy comes in. Canopy actually delivers the all in one practice management promise. It handles everything from proposal to payment and the steps in between. Smart client intake, tax workflows, month end, close automation and billing all are in one unified platform. No more duct taping ten different apps together. [00:02:30] Plus, they have Canopy Coworker. It's a secure AI assistant that lives right inside the platform and actually does real work. It drafts context aware emails, summarize clients histories, takes meeting notes, and turns them into tasks automatically. Early access firms are already seeing what's possible when AI works inside your workflow instead of alongside it. To see what a truly modern automated practice looks like, head over to The Accounting Podcast dot io slash canopy. That is Accounting Today dot promo forward slash CANOPY. [00:03:00]

Blake Oliver: So if you follow what's going on in the AI world, the big news in the last few weeks was all of those hacks by AI agents coming out of OpenAI. And I think it's happened to anthropic as well. They've been testing these frontier models and asking them to like, figure things out, find vulnerabilities and systems.

David Leary: I think Facebook's had a story where rogue agents would like they're creating secret, uh, message boards [00:03:30] and communicating with each other. Then they didn't like one of the messages, so they deleted that person on the board and changed their code. Like they're acting like humans, like asshole humans, but they're acting like.

Blake Oliver: Well, they're really intelligent models and they're given a task. And sometimes they decide to break the rules to accomplish that task, just like people. And this isn't just happening inside of these labs where they're developing these frontier models. It's actually happening to regular people and to small businesses. And the stories are actually [00:04:00] pretty funny. And one I saw that's not accounting related, that led me into this was, uh, about a guy in Australia who asked a cloud powered AI agent to book him a spot in a gym class. It's a very popular gym class, not a lot of spots. And this was on Instagram and the agent found a hole in the booking system that let it book weeks earlier than the gym allowed. And so the, [00:04:30] the user, this Australian guy asked if, if it could figure out how to move him up the wait list, and the agent figured out the system. It had no authorization checks, so it deleted another person's reservation. And when the guy realized what his agent had done, he asked it to undo that. But it couldn't because the booking was gone. So that's an example, right? Regular Claude user asked to automate a task and the agent like goes and deletes somebody else's booking because the website is insecure, right? [00:05:00] And this kind of stuff is is starting to happen in accounting and accounting today did a great write up of rogue AI agents in accounting and Sage's CTO, uh, who has been a guest on this show, uh, Aaron Harris, he wrote about how he was testing an agent that he named Arthur using a spreadsheet for a fictional company to see whether it could supply the reasoning normally structured accounting [00:05:30] software provides.

Blake Oliver: And what happened is that when two invoices arrive from the same vendor for the same amount, on the same day, Arthur assumed they were duplicates and deleted one without permission. And because Arthur had access to, uh, Aaron Harris's email inbox, It inferred that Harris would miss a delivery and emailed the vendor to reschedule it without telling him. But when confronted, it denied acting and [00:06:00] asked Harris to prove it. So you know this. This is when you give autonomy to AI agents. This is the risk. And actually something like this happened to me last night. David. I was using Claude in voice mode on my iPhone, and I have some rules in the desktop app where if I ask it to like send an email, it won't it, it will draft the email and stage it for me, but it won't actually send it. That's on my work account. And [00:06:30] that's part of like our organization settings that I configured when I set it up. But I was using Claude on a personal account and I hadn't configured that. And so it didn't have any of those restrictions. And it just sent the email. It drafted an email as me didn't run it by me and then sent it. Thankfully, the email, you know, didn't have anything bad in it, right? It didn't quite sound like me, but I mean, these are the risks you take. Um, some other [00:07:00] stories here in this article. Uh, Ellen Choi, founder of Edgefield Group, she has an AI chief of staff she calls Tars. I think that's from that, that, um, what's that movie interstellar.

David Leary: With the.

Blake Oliver: The, the robot that walks around that looks like a, like a brick.

David Leary: The blue phone book, a phone booth. Right?

Blake Oliver: No, no, he's like silver. It's like metallic. Anyway, it doesn't matter. Yeah. [00:07:30] She calls it tars. Tars mistook an unusual but legitimate purchasing pattern for duplicate payments and recommended auto refunding thousands of dollars in real revenue, but thankfully it lacked the authority to execute it. She hadn't given it permission to actually do refunds. But if she had, then you know, it would have done it. So her recommendation for anyone listening who wants to control these agents is to not allow write access or automatic execution. [00:08:00] So like if you're using the cloud desktop app or whatever, you, when you connect an integration, you can specify which tools it needs to ask for permission to use and which it can just use automatically. And I go in there and I always like, make sure that the right tools, the ones where I can actually change things or delete things, those I locked down pretty tight. I'm not going to let it like send an email without me. But you have to actually like set that.

David Leary: But yeah, you have to know [00:08:30] where these settings are. I just got the new Google Pixel 11 phone yesterday and it's very AI heavy, and it's every time I turn around, it's doing something automatically on my phone, like you called me earlier. And it immediately wanted to start transcribing and recording our phone call. Like, I don't know where all these settings are. Like we're entering this new world where like, it's, it's crossed the line of like me asking you how to do something too quickly. Like I'm going to start saying, stop doing stuff because I don't even know what it's doing at this point. I might have [00:09:00] to turn all these features off on my phone because I, I don't know what it's doing. It's just like it changes words on my home screen. It suggests this. It seems like it's convenient, like, here's your next appointment. But when it tries to record a phone call, I never said a setting for that. Where did this come from? So we're in a whole new world.

Blake Oliver: Byron Patrick also shared his experience with a rogue AI agent. You know Byron David, he's now a senior product manager at carbon, and he asked an assistant to summarize his thinking after [00:09:30] a customer conversation, but instead it created a shared document and drafted a Slack message to the team. Fortunately, no data left the company. Nothing was deleted, but. What if it had shared, like the document with somebody outside? What if it had emailed the information to somebody that wasn't on the team? His standing rule is, quote, give me a plan before acting, unquote. So the agent has to explain what it intends [00:10:00] to do and in what order before execution. Yeah. And.

David Leary: And we we've implemented that for AI in developer tools. All the coding tools have that, that ask and build, ask and build. But I'm not seeing it in accounting tools. It's just, there's a lot of just doing like, or maybe posting like it needs a draft and then a post. Yes, go post these transactions now.

Blake Oliver: All right, David, let's talk about all this off balance sheet AI financing.

David Leary: Or on balance sheet, I guess, [00:10:30] right, if you want to call it that for Microsoft's case.

Blake Oliver: And I'm going to let you kick that off with this story about Microsoft and their accounts receivable growing by tens of billions, tens of billions of dollars. Yeah. But before that, let me thank our next sponsor. And that is Thomson Reuters. If your tax workflow still feels like a grind every busy season, you're not alone. We hear from firm owners every week who are buried under disconnected systems. Manual data entry and staff stretched way beyond [00:11:00] their limits. But it doesn't have to be that way. Thomson Reuters built the tax automation suite to solve exactly this headache. It connects safes and Sure Prep and Ultratech CS into a single ecosystem that covers every step with true end to end automation, from gathering a client's documents to final delivery. We're talking up to 65% fewer clicks per return. Ai powered data extraction that saves 90 minutes per return. A 58% increase in capacity with current [00:11:30] headcount and a 55% improvement in profitability. Because those time savings go straight to your bottom line. This isn't some patchwork of tools bolted together. It's a purpose built suite where data flows automatically between every stage. That means no rekeying, no bottlenecks, and no back and forth with clients. Firms using it aren't having to bring on additional staff during peak season while still growing revenue. That's the power of real automation. To see why tax professionals across the country are making the switch to Thomson [00:12:00] Reuters, head over to The Accounting Podcast dot ProAdvisor automation. That's The Accounting Podcast dot com forward slash automation.

David Leary: Let's talk Microsoft. So Microsoft saw an article that Microsoft is owed billions that it hasn't collected. And so specifically they have 80 billion owed to them. 81 billion is on their balance sheet. And so first I was like, what's what's that versus like other corporations? Like we're paying a pitcher. So [00:12:30] our Apple or I'm sorry, alphabet, Google is about 55 billion. Nvidia is about 47 billion of accounts receivable. Apple is about 73 billion. Walmart's 10 billion. Caterpillar who in theory is selling everything. Financed. Right. Big huge. Tractors and machinery. Caterpillar. Right. Big hole diggers for. They only have $10 billion on their accounts receivable. And so then I was like, all right, well, like, what about the history? So if you go back to 2015, uh, [00:13:00] the end of the year there with about 17.9 billion, right? So this was a, as a percent of revenue, it was 19%. And the implied days to collect was about 70 days. But then it really and then they had a couple of years where it jumped a good 4 billion a couple times. But then you get to 2022, 2023, 2022 to 2023 is about a 4 billion, uh, jump. So it goes from 44 billion to 48, but then it goes to 56 billion, 23 to 24, then 2020 24 [00:13:30] to 25 from 56 to 69 billion. And now in 26, it's up to 80 billion. So what happened the last three years? Ai companies. Right. So so and so they've disclosed that of the 80 billion get the exact number here. 6 billion is definitely from open AI. But they don't disclose all the rest of who owes them the money.

Blake Oliver: And so this is wild because Microsoft invested money in open AI. Yes, open AI then buys [00:14:00] compute from Microsoft but doesn't actually pay them cash. It's in AR. I mean, we don't know how much I guess they've paid, but it's funny, right? Like so Microsoft gets the book the revenue even though it hasn't collected the cash. And this brings up an interesting question, which is like, if there is an AI bubble that pops and these AI companies can't pay their bills.

David Leary: All the legit companies are going to suffer, which is going to crash [00:14:30] the stock market. And then it just dominoes from there. This is a real. We have a real bubble happening. That's a dangerous bubble.

Blake Oliver: Well, let's talk about that off balance sheet financing, because that was all on balance sheet. But there's and that's only, you know, whatever one.

David Leary: Company.

Blake Oliver: $6 billion owed to Microsoft. Not a big deal. Wall Street Journal, they did an analysis of securities filing footnotes. And they found roughly 3 trillion in off balance sheet commitments across [00:15:00] nine companies alphabet, meta, Amazon, Microsoft, Oracle, Nvidia, Broadcom, SpaceX and AMD. All companies that are big in the AI bubble. The AI boom the article, if you want to go look it up, is called Why Big Tech's AI spending is 3 trillion higher than it seems. These obligations are tied to AI data centers, chips, hardware, energy, and future investments. Basically, all the capital expenditures [00:15:30] related to the AI boom. So it's $3 trillion off balance sheet commitments. How much of it is on balance sheet? 600 billion over the last 12 months. And it equals about three times their outstanding leases in long term borrowings. So there's 1.2 trillion of leases that have not commenced and 1.9 trillion [00:16:00] of purchase obligations. That's how you get to that 3 trillion number on commenced lease obligations. So leases that have been committed to, but haven't started four times higher than just one year earlier. Here's the accounting tie in. Under the current rules, purchase commitments get to remain off balance sheet until delivery. Future leases remain there until [00:16:30] the lease commences. Off balance sheet. So signed contracts. These commitments for $3 trillion do not appear as recognized liabilities yet. So this is going to make all these commitments that are not on the balance sheet make the leverage of these companies. In other words, you know, the debt versus their income and their their other assets harder for investors to assess [00:17:00] because it's in the footnotes. It's not in it's not on the balance sheet. So here's an example to illustrate this. Meta's Hyperion data Center campus. It's enormous. It covers the equivalent of 1700 football fields.

David Leary: That is insane.

Blake Oliver: That's you. Imagine 1700 football fields all stuck together. Meta is building this project, but neither the campus nor [00:17:30] its $27 billion of construction debt appears on Meta's balance sheet. A company called Blue Owl Capital is a private equity fund, is funding most of the joint venture that owns Hyperion. It has a holding company. The holding company is Beignet Investor. It raised the construction financing through bonds, so it issued debt in the form of bonds to fund the construction. And meta, even though it's Meta's [00:18:00] campus, is the minority owner in tenant, and it makes the lease payments that support the payments to the bondholders. It has a four year lease that begins in 2029, with renewal options extending 20 years. Meta has guaranteed bondholders against losses if it leaves before the full period, but hasn't recognized the liability because it considers payment under the guarantee. Improbable. So it's saying that [00:18:30] it itself doesn't think that it's not going to be able to pay the lease payments. So therefore it doesn't have to recognize a liability because it probably won't happen. So you see the the risk there that is no longer represented in numbers on the balance sheet because, you know, a potential future liability should be calculated. I [00:19:00] mean, investors would think about that, right. But under the accounting rules, if it's improbable enough, you don't have to recognize it at all.

David Leary: The accounting rules are there. But but from the public opinion, when this all explodes, who do you think's going to get blamed? Accounting firms, accountants and accounting firms. The auditors for the auditors. But why didn't you tell us this was going to happen? Why didn't you tell us these numbers were not kosher? Right? Like they're just gonna they, [00:19:30] like accountants are going to be the ones that get blamed for the AI bubble pop when it's all said and done. It should have been the episode title name. Well, accountants will be blamed for the AI bubble collapse.

Blake Oliver: So that Hyperion lease commitment. It's, uh. Meta has reported an initial Hyperion lease commitment of about 12.3 billion and 347 billion of total uncondensed lease obligations as of June. So only 12.3 billion of only [00:20:00] 12.3 billion is on the balance sheet, 347 billion is not yet. That's a big difference. 12,000,000,347 billion like it shows you the scale of all this off balance sheet, all these off balance sheet liabilities.

David Leary: It's going to have to show up somewhere eventually, right? Like or somebody or, or as soon as somebody doesn't pay, it's going to be like that collapse, right?

Blake Oliver: Because, well, let's say meta doesn't make [00:20:30] good on its, uh, on its lease payments. What is going to happen to that holding company, to those bondholders? They're not getting their bond payments right. They're not getting their money. So then the bonds plummet in value because the rating goes down. It goes to junk because meta is not going to pay it if that happens, like if meta, if meta gets in trouble, it won't make the payments and nobody else is going to do [00:21:00] it, because who else is going to be able to take over that campus that was basically designed for meta? Like, is it? Yeah, easy just to take over someone else's data center? And these chips, we've been talking about how the chips are theoretically only useful for like 2 to 3 years because things are changing so fast. So why would anyone want to do that?

David Leary: Nobody's going to buy the old chips.

Blake Oliver: Yeah. And you know, meta is saying that, oh, it's really 5 or 6 years. But even that's not very long. [00:21:30] Like they depreciate in value very quickly.

David Leary: It's starting to feel a lot more like 2008 and not the 1999.com bubble. 2008 was all the packaging of bad loans inside of bigger packages of bad loans and a lot of circular, arguably circular financing. Right.

Blake Oliver: And that's all the derivatives, all the derivatives around those mortgage backed securities.

David Leary: Yeah. And it was rolled up, rolled up, rolled up. And as soon as one of it collapsed, like they, they the demonstration was this Jenga tower in that movie, right? It's [00:22:00] one collapsed and then everybody collapsed and it took out a whole bank. Like this is this is it feels like.com 1.0 was just a lot of speculative bubble in investing. Yeah. They weren't all tied to each other. It was just people. Oh yeah. Sure. Pets.com and they're just investing in these companies. Right. But it wasn't like this is the companies investing each other, which is a whole different game.

Blake Oliver: The circular money thing. Yeah. It's it's there's, there's, it feels similar, but it's also different. I mean, we don't have the derivatives. The derivatives are when you get into real trouble because then it's really hidden. [00:22:30] Yeah. When you have derivative financial products on top of, of securities that have been packaged together and repackaged together a bunch of different times, and nobody knows what's in there anymore. That's when you start to get into like layers and layers is when you start.

David Leary: That kind of what the SpaceX IPO was.

Blake Oliver: Well.

David Leary: I mean, it was a roll up of all these other things rolled up into the SpaceX IPO. It was confusing. Now you're investing in things you didn't know you're investing in.

Blake Oliver: I mean, yeah, it's it's similar right? [00:23:00] It's like bye bye packaging together all these smaller things because.

David Leary: You're investing.

Blake Oliver: In.

David Leary: Twitter that you didn't want to invest in, but now you have an investment in Twitter.

Blake Oliver: And really you just want to invest in rocket technology or, or what the real winner, which is what the satellites. The Starlink. And then, you know, people also like just betting on like Elon Musk to figure out AI better than anyone else and just, you know, win win the race, right? But yeah, you're right. It's like if, if you actually took all the pieces and considered them separately [00:23:30] and ipo'd them separately, they would not get the price that you get if you bundle them all together. Because when you hide all that, that stuff, right, you get more interest because people want to buy one thing, but they have to buy the package. It's like cable.

David Leary: And that's what they did with the loans, right? They bundled them all up and then stuffed a bunch of bad crap in there like Twitter. Yeah. Into a different investment. It feels more similar to that than it does the.com 1.0. Boom. [00:24:00]

Blake Oliver: A few other companies I just want to highlight alphabet. Alphabet, um, has lots of purchase commitments and contractual obligations. It was 811 billion as of June 30th, 811 billion. It went up that much to that number from 332 billion only three months earlier. So it went up by like 400, 500 billion, right? Nvidia [00:24:30] committed to 27 billion of equity investments between April 26th and the end of its fiscal year in January 2027. Like less than nine months, I think 27 billion of equity investments. And here's the problem, right? We talked about those lease payments. Alphabet and Amazon recently reported negative free cash flow. So that means CapEx is exceeding operating [00:25:00] cash generation. They're spending more to invest in capital assets. These data centers then They're getting in cash from customers and free cash flow when that goes negative. That's like the first indicator that there could be a potential issue because they have to for this to be sustainable, they have to have free cash flow. You can't run a business on negative cash flow [00:25:30] indefinitely. So something has to turn around. These assets have to start generating enough revenue to cover the lease payments or it's not going to work, and then they're going to.

David Leary: Default if there's no revenue coming in. Because that's the one thing with Microsoft, right? Part of the article is that all these receivables is generating $183 billion in revenue or cash flow for them coming in. And you're right, if you if you owe all this money, you have, if you if you don't have the money coming in, which is obviously happening [00:26:00] at different parts of this chain.

Blake Oliver: Yeah. And this is the thing that like the average person, the non accountant just struggles to understand is the difference between revenue and cash?

David Leary: Yeah.

Blake Oliver: Because it's all about timing. And when you have a period of heavy capital investment and circular financing, you've got all these companies reporting revenue, but they're not getting cash in the bank. And eventually [00:26:30] the cash has to come in or the whole thing collapses. So there you go. David, should we talk about Xero Con a little bit since we teased it?

David Leary: Yeah.

Blake Oliver: We don't have very much time at all because we got to play this banjo interview about the billionaire tax.

David Leary: Yes. So let's jump into the next ad for AMP. I'll do that while you prepare your story.

Blake Oliver: Sounds great.

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Blake Oliver: You gotta ask the AI to fix your settings, right? Can it do that now? Because I can't do that with my iPhone.

David Leary: Yeah, I have like literally it's on do not disturb. I apologize for that. So we'll rewind for a second there. Seamless QuickBooks and Xero integrations eliminate manual journal entries [00:28:00] and they support any type of business. You serve farms, restaurants, nonprofits, you name it on pay can handle unique requirements without adding complexity and keeps pricing simple to everything your clients expect, from multi-state filing to off cycle pay runs. It's included no hidden fees, no surprises. To book a demo. Head over to Accounting Today dot promo that is Accounting Today dot promo forward slash ONPAY.

Blake Oliver: All right, we got to talk about zero real quick. We've got like five minutes and then I have to go and then we'll we'll [00:28:30] play this interview for everyone. That'll be like the rest of the episode. Okay, so zero con neither of us were there. We got the press releases. What stood out to you, David? I see a bunch of AI stuff.

David Leary: I think what the new things that stood out to me were, stuff was pumping out. So they bought Melio, in theory to get new customers in the States. But it's looking like Melio is becoming like a innovation development center. So Melio launched an [00:29:00] expense management tool, which is weird because didn't zero by Hubdoc for that, right?

Blake Oliver: Yeah. What happened with that?

David Leary: Yeah. What happened to that? Um, Emilio announced that they have an API, but then what's the other thing that caught my eye was Emilio announced the launch of Casper, and it's an AI powered client manager for accounting firms. So Casper will proactively identify missing information, go contact clients, retrieve information for the close. So they built like a close agent called Casper that will [00:29:30] work with Jax, the agent in zero. But it's interesting that, you know, this acquisition now is leading to these other new product integrations for or I would say integrations, but product offerings for zero.

Blake Oliver: It sounds exciting, but the issue with this kind of thing getting into practice management is that it never quite works the way you want it to. As an accountant, like I've never heard any accountant say, oh, I love the QuickBooks Online Accountant practice management tool [00:30:00] or whatever Xero has built in previous years like it's never right and you always end up using something like our sponsor this week. Canopy.

David Leary: Yes.

Blake Oliver: Because they are specifically building practice management, not just bolting on something to a GL. And it doesn't get like the feature prioritization.

David Leary: It doesn't get the attention it needs. Right. So it's one product manager, one developer, and then it never gets the support. And then that person leaves and then the whole product project falls apart. Yeah.

Blake Oliver: So [00:30:30] I've always said they should just partner with these practice management solutions to like integrate better. And that's what zero did when it comes to payroll because they struggled to build payroll in the US for years. They partnered with gusto eventually and built an integration to do that. And now they announced that xerocon that Xero payroll is powered by gusto. Basically, they they brought gusto directly inside of zero. And why not do that with the practice management apps? Let you let [00:31:00] you know. Let let them create like a tab that you can open up in zero and have your practice management stuff there. Why not do that? And if you could just choose which one you want to use carbon or canopy or what have you. Right.

David Leary: Well, I think the difference is zero. Tried to do that with gusto in the past that these failed rollouts of zero payroll with gusto, but gusto as a platform has changed to where they they [00:31:30] are basically payroll APIs that you could build a payroll app on top of. And that's basically what Zero's doing. They're building a payroll app on top of. It's powered by gusto under the covers. But it's really not it's not it's not going to taste and feel like.

Blake Oliver: It's Zero's UI, but then connects.

David Leary: Gusto Zero's UI. It's Zero's calculations, calculators. It might be well, I'm sorry. Sorry. You said Zero's UI. Yes. Zero's UI gusto.

Blake Oliver: Gusto is powering all the actual payroll calculations and everything. And so okay.

David Leary: So going back to your argument [00:32:00] about practice management, one of the practice management platforms, like a canopy or something would have to have like an API where zero could build a front end that's powered by the practice management APIs or the engine.

Blake Oliver: Let's see any other updates from zero Con that are worth highlighting here. Oh, they've updated auto bank reconciliation. I griped about that on the show previously. My problem with it, I turned it on. And [00:32:30] my problem with it was that it was reconciling stuff, but it wouldn't tell me why. I could view a report of what it had auto reconciled and what it had done, but I couldn't see the logic and I couldn't teach it. So now the auto bank rec tool will explain why it matched high confidence transaction transactions and send exceptions to the humans. The tool has auto reconciled more than 100 million transactions since launch, probably incorrectly. So maybe they should also build a tool to go back and audit what it [00:33:00] did. They've got this new smart document capture feature that will read source documents and enter data directly into zero. Easy win to do with AI in the future months. Their bank Rec, their auto bank rec tool is going to address more complex cases, including splitting one payment across sales and fees. They've got this feature called document requests coming soon. That's going to let the zero AI, which is called Jax contact clients, [00:33:30] send reminders, answer clarifications, and match documents to transactions while requiring the accountants to approve every step. I wonder if that's the same thing as what Melio announced.

David Leary: That might be the Casper.

Blake Oliver: That's the Casper.

David Leary: Thing. Yeah, I think that's the Casper.

Blake Oliver: Cash flow actions identifies potential cash flow shortfalls, payment follow ups and bill protection aim to accelerate collections and improve control over outgoing cash. Oh, those are feature names was so confused. So they're going to be building these features. I hate [00:34:00] covering future product roadmap stuff that gets announced at conferences. I skipped past that. No more coming soon stuff. Sorry guys. You got you can't you can't fill up your conference with promises. Just show us what you've built. Announce it. They're like, you get into that habit. And the problem is you're always going to be doing future stuff until you get to the point where like some of these apps, like there's nothing new at the conference. And it's all just, here's what we're going to do. And then it's always, here's what we're going to do forever. And they never actually do it.

David Leary: Like, well, Microsoft was the king at [00:34:30] that, that to intimidate others from getting into the market.

Blake Oliver: All right, David, I have to run. But first I want to introduce our guest this week. David and I sat down with an economist, a research fellow from the Hoover Institution, who has run the numbers on the California billionaire tax measure. And it's a lot messier then either side is letting on. There's a lot of complexity in this, especially because it's a wealth tax, and [00:35:00] taxes on wealth are really hard to calculate. And there's a lot of unintended consequences in this. California. One which is on the ballot is going to be a doozy. If it passes, it's looking like it might because as you say, David, in the interview, it's like 48% approve it.

David Leary: They need 50% to pass it and it's like 48% are supporting it already, which is amazing to me that the numbers before you hit play where you're queuing that up, I'm going to do our last ad for Cloud Accountant staffing.

Blake Oliver: All right, let's do it.

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Blake Oliver: So, David, we've been talking about this California billionaire tax on the show a lot recently. Uh, this one time 5% tax net worth, California residents worth $1 billion or more. So it's it's a wealth tax on billionaires in California. And there's a lot of opinions about this.

David Leary: Because it's going to go to [00:37:00] the ballot, right? It's going to be on the ballot.

Blake Oliver: Yeah. Proposition 40th November third on the ballot in California. And there's a ton of opposition to it, a lot of money flowing in from obviously, billionaires. I think it was one of the Google founders has put in over $100 million to fight this proposition. And then there's a lot of money and activity coming in from the left. We've got unions supporting it and [00:37:30] the governor caught in between. So we wanted to get a different take on what's going on with this. And so we've got Ben Jerry's here from the Hoover Institution. He's a research fellow there. Ben, welcome to the program.

Ben Jaros: Hi, Mike. Hi, David. Thank you for having me on.

Blake Oliver: Great to have you here. So, Ben, you know, let's talk about this, uh, this tax, right? Is it good? Is it bad? What's it going to do to California's economy? Is it going to push out [00:38:00] the billionaires? Is it going to raise the money it's supposed to raise? Give us your take.

Ben Jaros: Yeah. I guess I'll stay away from good and bad. That's more of a opinion position.

Blake Oliver: And you leave that to us. That's all right. Yeah.

Ben Jaros: I'll leave it to you guys. Leave it to your listeners, and I'll just present what we've worked on at the Hoover Institution and how I see the measures. So prop 40, as you said, is on the ballot November 3rd. It is a one time 5% tax on net assets of [00:38:30] people who have over $1 billion in assets and excluding residential real estate. It's important. Exclusion, good or bad for the state. Uh, the proponents, when they filed it, wrote an expert report Claiming that the measure would raise about $100 billion for the state and that the revenue would go to backfill funding reductions from one big, beautiful bill. That's their claim. When [00:39:00] we went through residency or audit, so to speak, our team at Hoover, what billionaires had actually left when you exclude the billionaires who actually left, who filed, uh, either move their businesses, most notably, uh, Larry Page moved 15 of his different businesses before the filing date. And, uh, Sergey Brin as well moved some of his. You lose about $5,500 billion of the taxable base if you just [00:39:30] use their December 31st. Functionally, it's January 1st, 2026 cutoff. So when you actually start removing individuals who may have left in time, you get a max Revenue of $67 billion. That's your top end. If you start removing people who you're going to have and you're a lot of this is an accounting.

Ben Jaros: And I guess probably some tax lawyers are on the listening to this as well. If you moved a lot of stuff before the [00:40:00] first, you're going to have a residency fight no matter how you square that peg, um, around that square peg. So you have the ceiling there. And then our team tried to estimate, okay, what about silent departures, people who don't make the news and we from that for that estimate, we looked at the European wealth taxes and what behavioral response, how many people moved, why people? I mean, net assets, what what fraction of the assets moved. And our team estimated [00:40:30] a lower bound of 35 billion, with a central revenue estimate of around 40 billion, you know, 35 to 46 billion. So that's. So we estimate about 40 billion when you go through who left. And we also included residential real estate. So we went through these are billionaires. So you can find a lot of the residents residences on Redfin or Zillow, realtor.com. We found about 130 something of their residential real estate assets, and we exclude them from the base. The proponents didn't do that. And, uh, yeah, [00:41:00] when you when you do that, that's how you get to that 67 billion round number. So, so.

David Leary: So when they introduced the bill, the thought was, hey, there's 536 billion we're going to possibly tax. And then as people flee the state, now it's down to you're saying around 40 billion left.

Ben Jaros: Well, so there's about when they put it on the ballot, there was about 2.3 some odd trillion dollars in net asset billion or net assets. Right. They say in October, when this measure [00:41:30] was filed with the attorney general's office, there was about 2.3 ish. You give or take, right. There's there's a lot of publicly traded companies. It's around where where it is between the filing date and late October and December 31st, about 500 billion of that 2.22.3 left the state.

Blake Oliver: Wow. That's a lot.

Ben Jaros: So that's well, there's a residency dispute there. But as a [00:42:00] accounting The Accounting Podcast tax law podcast, it's not revenue the state should bank on getting if you're conservative about it. Um, and they publicly, I mean, it's not my job to relitigate whether the New York Times is tracking where Sergey Brin and Larry Page is. If they said they moved and they incorporated 15 of their businesses in a different state, I guess good luck to the state of California trying to get them. Uh, or anyways. Yeah. So that's, that's what I'm saying. So they, if they're taking the, the [00:42:30] 5% of the 2 trillion, then you get the 100 billion and they have a behavioral response estimate. They estimate about 10% would move or leave, and then a greater fraction than that moved before the 31st cut off date. And then in late February, Mark Zuckerberg left as well. Him leaving alone would decrease that 67 billion, another $12 billion. But he left after their cutoff date. So that's an interesting thing to talk about on the podcast is the way the framers, the proponents [00:43:00] wrote. The measure is the measure was voted on in November. But the residency for whether you are you pay the tax. Your residency is determined on one day, January 1st, 2026, retroactive, which is going to create many people in your mind probably thought a clear, probably due process and commerce clause issues.

Blake Oliver: Right? Because I've left the state, let's say I'm one of those 200 billionaires who decided [00:43:30] I'm leaving, but I didn't get out before January 1st. Now I'm somewhere else. I'm not in California anymore. Do they even have jurisdiction or whatever you want to call it?

Ben Jaros: That's right.

Blake Oliver: Is that tax me?

Ben Jaros: That's right. Is that revenue going to be disallowed? Mhm. Right. Not in dispute. Dispute would mean California has a claim on it. Will that will those net assets be disallowed by a court. And there's I'm certain whoever's advising Mark Zuckerberg has made that point that his $12 billion could very plausibly [00:44:00] be disallowed by the by the courts because he's left.

Blake Oliver: So it sounds like the argument that, uh, well, what you're implying here is that you you do a tax like this, you decide you're going to tax 200 billionaires on their net assets, and a bunch of them are just going to get up and leave the state, reduce that taxable base there and thus, you know, weaken the tax. I want to dig [00:44:30] into this more because we've seen other states do this. Massachusetts they passed a millionaire's tax back in 2022, and in Washington, there was a capital gains tax in 2021. And as far as I know, we didn't see a bunch of millionaires leaving those states.

David Leary: So why is Bezos didn't Jeff Bezos leave Washington and move into his parents house in Florida or.

Blake Oliver: That's true. Well, it wasn't his yacht. I don't remember.

Ben Jaros: I [00:45:00] mean, my pushback on that is those taxes were not wealth taxes. They were increased rates on income taxes, higher rates on earned income. Wealth tax is different. The the effect the comparable capital income tax rate on a 1% wealth tax, if you assume historic risk free rates to capital is about 17.5%. So, you know, take a 5% if 5% would be 52.5%. We have a calculator on our on our website [00:45:30] and a paper to back up that.

Blake Oliver: So, so so you're saying like a 5% wealth tax, one time wealth tax would be like equivalent to a what income tax?

Ben Jaros: Well, so remove the word one time. A 5% wealth tax would be equal to a 52.5% income tax.

Blake Oliver: It was 5% year after year.

Ben Jaros: Yeah.

Blake Oliver: Got it. This is going to be a one time wealth pledge right.

Ben Jaros: Allegedly an important let's let's talk about that. There is a a clause within the act where the legislature with two thirds [00:46:00] majority can amend any part of the act if it furthers the purposes of the act. So they can get rid of the one time they can get rid of the rate, the they can change the rate, and they can change the threshold with two thirds vote in the state legislature. So to maintain its one time means you're entrusting that. What California wants to use these funds for the state legislature is also just going to say, yeah, this is a one time cost. So we could, you know, first adjust that point. Let's dig into [00:46:30] that If you want.

Blake Oliver: Yeah, let's do it.

Ben Jaros: Okay. So the the proponents say that the revenue and we can say, okay, there's dispute between 100 and $40 billion, the revenues going to fund health care reductions. One big, beautiful bill. Okay. What were the reductions from one big, beautiful bill that impact the state of California? There's two main components. First are the eligibility requirements. What are those? If you do not work, go to school [00:47:00] or volunteer 80 hours a month, then and you are on Medi-Cal, which Medi-Cal is the state's version of Medicaid. Then you. Within a six month period, the state of California is supposed to audit. It would lose your coverage to Medi-Cal. Now there's about 15 different exemptions. You're not able bodied. You're exempt. Dependents exempt, uh, snap exempt, 15 different exemptions to that. It's a pretty kind of a Clinton era esque work requirement would be the way to put it. Uh, from the 90s and [00:47:30] about 90 billion of the 156 billion over the next ten years. So about two thirds of the reductions come from that. The last 60 billion or so. It's about $150 billion over the ten years. The last third comes from provider tax limitations, which, you know, most people's eyes glaze over when I say that, but provider tax limitations are where the provider taxes when the state of California levies a tax on health care providers, the health care providers that pay the tax, the state [00:48:00] of California then uses that tax revenue to fund health care in the state, and it draws down federal matching funds. So that's so state state of California's better off state health care facilities are better off. In fact, in the last ten years, the state health care facility has lobbied to increase this tax.

Ben Jaros: And we'll leave that there. And the only one worse off is the federal government, which is through increased matching funding. A lot of that change, uh, state of Connecticut in the last ten years famously balanced their state budget. Through increasing provider [00:48:30] taxes. The Biden administration flagged the provider tax limitations of California specifically as a A. A gross use of the exact quote is wrong, but he flagged it as a not not in a a non equitable. It's a misalignment of the way the the, the federal drawdown was supposed to be. The increased matching was. So if a state wanted to fund more health care, the federal government going to help them do that, not use a circular finance mechanism to increase it. Okay. So there you go. So that's what one [00:49:00] big, beautiful bill does to the state. Let's talk about Billionaire Tax Act. The language of the act itself does not commit the state of California to taking on the individuals who do not, uh, meet that work requirement. Right. The proponents have said it does, but in the actual act language, it does not. It just designates it designates a new health care spending account for the legislature to draw down 22.5 billion a year. And, you know, some fraction a year for education, you know, 10% for education. [00:49:30] It doesn't require that it's actually going to backfill. So maintaining that it's actually doing a backfill from one of the beautiful bill is not accurate. You're relying you're relying on the legislature. Then once that money exists, spending it on that ineligible population.

Blake Oliver: And they could choose not to.

Ben Jaros: They they have to spend it on health care education. Uh, but they don't have to pick up the people who lost coverage from one big, beautiful bill right in the state of California is projected to run a $93 billion deficit [00:50:00] over the next four years. So the idea that they won't find uses for that money is, uh, potentially stretches credibility, right? So then you're they run out of if you, if you use our revenue estimate and you include the lost income tax revenue. So we can chat about that. Uh, but and you include income lost income tax revenue, the state of California would run out of this one time revenue by 2029, and two thirds of the reductions from one big, beautiful bill are going [00:50:30] to take place. Take case take place after 2030 because that's when the provider tax limitations start coming into effect. So what that means is the state's going to run out of the money right when they need it most. And the idea that if they would two thirds vote can just change one word in it and make it permanent and aren't going to do that. Um, I would say an expectation that's unlikely. And the billionaires are pricing that to be unlikely by the way they're moving. They're not reacting [00:51:00] like this as a one time tax. And I think that they have real reasons, other than academic reasons to conjecture about whether they trust the California legislature. Uh, I'm just conjecturing on what's going on in Sacramento.

David Leary: I think their suspicion is probably somewhat valid because anytime somebody has an increased budget, you change your behaviors to spend all the money. And then now the budget went away. But your behaviors don't change. So you're going to have to go get more money. Like it's, yeah, I probably could agree with the billionaires. It's probably [00:51:30] highly likely this is going to get extended. It's just it's the nature of government, right. And spending of money. Those departments once, once they get that money, they don't want to, they want it again and again and again. They're hooked on it.

Blake Oliver: Then let's set California aside. Well, I guess we can include them, but let's just think about this in in principle, in general, right? If a state wants to raise more revenue from wealthy residents and they [00:52:00] don't want the impact that a wealth tax is going to have, which it seems to be having, which is these billionaires now leaving the state, which means a bunch of money is leaving the state, right? Assets are leaving the state. Is there a right way to do this? Is there a different way? Is there a better way?

Ben Jaros: One that's been talked about in a lot of circles for years on the federal level is called closing the tax gap between what people are projected that they owe versus what they actually end up [00:52:30] paying in taxes. And it's a good The Accounting Podcast it's great to chat about this.

Blake Oliver: Um, oh, we love the tax gap, right?

Ben Jaros: Like there's a, there's.

Blake Oliver: An entire episode on it.

Ben Jaros: The, the question, right. You could argue a lot of what has done, been done on a policy lever to fix that in the last 20 or 30 years has been, you know, grab a hammer and, you know, more enforcement on the IRS side or enforcement side.

David Leary: But that's not true because they've been cutting the IRS for 30 years. The budgets, there's not more enforcement.

Ben Jaros: Well, with [00:53:00] the exception of the IRA. So my but the idea within the policy space is a response to tax gap has been, well, we need more enforcement. And I would contend that the last 30 years undermine. I think, to your point, David, undermine that point. I wonder if parts of these are structural, right? Whether the way we have separate accounting on a territorial basis versus, you know, we have apportionment on a statewide basis. And we, uh, it's a way of determining [00:53:30] what fraction of business activity is taking place in a jurisdiction, whatnot. I don't work in the Office of Tax Analysis in the US Treasury, but if you could argue if they were really serious about working on that, they would look at what structural issues in the IRC should we do research on that are going to reduce the cost? We literally have to pay for enforcement, but make it structurally make it structurally a way where the tax gap is closed. How can we close it through changing either the incorporation [00:54:00] or the way we realize income? Plenty of people talk about the stepped up basis at death. I mean, I think the the the borrow by die narrative is overstated. If you look at actuarial tables of what billionaires are actually going to benefit from that, at least in theory. I think it's overstated. It's a great talking point, right? And for those listeners who don't know, borrow ideas, I'm going to I'm going to borrow against my assets. Elon, [00:54:30] you know, Elon Musk could borrow against his assets, spend that money, but then the return of his assets is going to exceed what he has to pay on interest for the debt. So he can just infinite money. Glitch, right. So to speak.

Blake Oliver: And then he dies and his.

Ben Jaros: Assets go down to his heirs.

Blake Oliver: And they get this. They never pay the tax.

Ben Jaros: Exactly. And and I if you really look at the if that was actually true, you'd see more people doing it. Uh.

Blake Oliver: The only most most billionaires want to live [00:55:00] forever. They don't want to die.

Ben Jaros: Is that right? So the only, the only, I think, and some people probably could do much more serious work than my back of the envelope work with an actuarial table. But unless you're within five years of death, it doesn't seem like it makes a lot of sense to me. But and if you know you're within five years of death, that's another interesting, you know, look through the through the looking glass moment, I guess.

Blake Oliver: I got one more question before we go, Ben. And that is, is this even constitutional? Because this is [00:55:30] a tax that targets basically 200 people in a state of millions and millions and millions of people. And I always had this impression that, like, taxes are supposed to be, uh, you know, generally like equitable or, uh, like you can't just can you even could you do that? Could you just pass a law to tax one person?

David Leary: Is that the only tax breaks?

Blake Oliver: Yeah.

Ben Jaros: You cannot write a bill of attainder would be the, the legal phrase for this. Right. That the the [00:56:00] majority cannot vote. We're going to tax the the federal Congress could not tomorrow say we're going to pass a trillionaire tax. Couldn't do it. Uh, there's only one person that hits uh, that would be unconstitutional under the Bill of attainder, sits somewhere between commerce and due process. And there's some tax attorney who can explain this much better than me. Um, whether the 200 individuals hits that threshold, I don't know. There's certainly legal arguments for why it does and the other parts where it's not where it's going to face a lot of constitutional challenge [00:56:30] are first and foremost that retroactive residency clause, right. Can we pass a tax in November that's effective back to January? That is a new tax right? That's a key point within law. There have been non there have been priorly existing taxes that have been changed retroactively but not new ones. Um the second is whether that one day of residence gets the application of a full, you know, you guys might know this better. 183 days of residency for income tax purposes gets squeezed into one day. [00:57:00] That's going to be a fight. And then, um, they want worldwide assets, right. So they're trying to tax worldwide assets to Rihanna who is a foreign national. I think Barbados one of those. Right. If she has assets there, those we have tax treaties. And then the supremacy clause, the constitution that says taxing authority estates stops for the federal at waters edge where the where the federal taxing authority stops. So whether California [00:57:30] can lay claim to assets that are literally outside the jurisdiction of even the nation as well. Good luck. Um, yeah. So those are all clear legal problems. Whether it's patently unconstitutional is for a tax attorney or a judge to decide. But I, I as an economist, reading it with some tax attorneys on our team, there are clearly constitutional issues with it. The state of California, if it passes, will have to fight it. Um, yeah, there's my that's my final answer on that.

Blake Oliver: David, I'm going to let you have the last [00:58:00] question.

David Leary: Yeah. So I saw some poll results and you have 48% of the people are for it, 41% oppose it and 11% are undecided. What is the argument that the billionaires are making that they have in common with the common voter to convince 41% to oppose this? I'm surprised there's not a higher amount of people opposing this. There's no interest. I share no interest with a billionaire. And then the second follow up.

Blake Oliver: Are you surprised that it's higher, not higher, or is it not higher?

David Leary: I'm surprised [00:58:30] 48% of the people are supporting or 40% support the tax, but an amazing 41% are against it. That considering it's 200 people, it's an amazing percentage. That tells me that when I think Sergey Brin just spent like $100,000 on advertising.

Blake Oliver: Hundred.

David Leary: Million.

Blake Oliver: I think it was 100 million, 100 million.

David Leary: Yeah. Against this, like obviously, what's the argument? Like, what's making people believe, oh, this is bad for the state of California or bad for the country?

Ben Jaros: You know, I [00:59:00] actually, I think it comes back to not just the right phrase and word idea ideas, social, compact. We pay taxes and we get a certain level of public services for them. There's something broken in the state of California right now, and it became really visible in 2020. But it was it's been going on for the last 26 years, since $2,050 billion in taxable income has left California for other states. That's equivalent of $5 billion plus in income taxes. [00:59:30] So some people are saying, I pay X amount of taxes, and the public services I receive are not commensurate to it. And eventually the level gets out of whack and I move. It's not a question of who. Uh, it's not a question of if. It's a question of who. Someone knows who lives in California, who left in the last ten years for some other state, whether it's Nevada, whether it's Texas, whether it's Colorado, Nevada, wherever. And that is starting to ring true. So the proponents are saying people don't actually move because of tax increases. And [01:00:00] to that, I would say as wherever I sit as a layperson or expert. Elon Musk was in California six years ago. Larry Ellison was in California six years ago. Peter Thiel was in California in the last five years. That's all true, right? We know they were here and they left because at some point, right, Tesla should still be building cars in California. They're not, or at least it's reduced. Their operations are reduced. That [01:00:30] is tangible. I can see it. It doesn't matter what an economist says at Berkeley. I see people moving. I know people in the upper middle strata who moved because and you can look at this if you had dependents during Covid in California, it was one of the most likely predictive impacts.

Ben Jaros: Okay. You were getting out, schools closed. I pay a high tax bill and schools are online. I'm out of here. Right. So something's broken. And whether that gets communicated to Sacramento, whether that gets communicated to the proponents, I don't know. But that's [01:01:00] this is an opportunity for that 41%. And potentially higher. I think that's what they see, that this is not an academic exercise, that when these founders leave, that there's costs that aren't being talked about by the experts, so to speak, that they they own. I mean, since 2015, about a quarter million jobs by anchor firms with Google, meta, etc., have gone to other states. That's a that's a real for them, a plausible issue. That's a tangible issue in their neighborhood. [01:01:30] That's what I think it is. I think it does come down to that. They recognize that something's out of balance. They may not be the one paying, but they they implicitly know what is. What does California need revenue for? Since 2019, state tax revenues are up 55%. That's greater than 45, 46 of other states, entire state budgets. And. But somehow they found a way to spend 60% more on. What did your services in California go up by 60%? I haven't heard any. I, I mean, if I, I'm not [01:02:00] meeting people who validate that view. So there you go. That's that's the summary on it, David. And, and I, you know that there it is.

David Leary: And is this a trial balloon? If this passes in California or other states going to be like, hey, we just got like five new billionaires here. We should just do the same tax, like.

Ben Jaros: In 2023 or 24. State of Texas made it unconstitutional tax. Well, just as a sidebar, I'm not a billionaire. Uh, very.

David Leary: Interesting.

Ben Jaros: Uh, right. So maybe some [01:02:30] states recognize we're going to benefit from some capital flow if we make our business environment more supportive and friendly to that. Um, yeah, that's, I don't, does it scale? Great question. I don't know, I, I, I'm not an armchair political economist. Um, some people are making the case that it will, I don't, I don't know, I guess if it passes, see how it goes, that's certainly that's what the proponents want. But as you pointed [01:03:00] out, David, enough of the California electorate is saying, we pay. We pay Sacramento enough.

Blake Oliver: If it passes, it's going to be an incredible case study for what happens when you do a meaningful wealth tax. Ben, thank you so much for joining us and sharing your knowledge with our listeners and with me and David. Very informative. I've been speaking with Ben Jarrar of the Hoover Institution. Ben, thanks a lot.

Ben Jaros: Well, David, thank you for having me on.

David Leary: Thanks [01:03:30] for joining us this week, everybody. Don't forget, you can get CPE for listening to this show. You just want to head over to earmark.app. You can register really easily. If you already registered, just go to the latest episode, take the quiz, get your CPE certificate for this episode, and check out all the other shows and courses and channels that we have in the earmark app. Just earmark.app. See you next week, everybody.