Politics 5 min read By Alice Ashford
California Voters Weigh One-Time Wealth Tax on Billionaires Under Proposition 40
A proposed California wealth tax, which voters are set to consider, could collect substantial sums from the state's richest residents, including billionaires, while economists dispute its effectiveness.
The ten richest billionaires in California could together pay more than $30 billion in taxes alone if voters approve a wealth tax proposal known as Proposition 40. It would be a one-time tax on state residents whose assets exceed one billion dollars, at a rate of 5 percent of their assets. Proponents of the initiative say it could bring in up to $100 billion in revenue and partially offset federal cuts to health care funding.
Supporters point to the artificial intelligence boom and argue that the state's wealthiest residents would still remain among the richest people in the world after paying the tax. Opponents warn that the tax could hit economic growth and startups. According to them, founders would have to sell large shares of their companies, and wealthy people may eventually move to other states, resulting in net revenue losses.
The debate over Proposition 40 takes place against the backdrop of another landmark decision made almost fifty years ago. In 1978, voters approved Proposition 13, which capped the property tax rate at one percent of assessed value, limited annual increases to two percent, and allowed reassessment at market value only after a sale or major renovation. The measure emerged amid the tax revolt that preceded Ronald Reagan's election as president, and it has since forced the state to look for other sources of revenue.
After this law was adopted, California relied more heavily on income taxation, including capital gains. Today the state has the most progressive income tax system in the country, with a top marginal rate of 13.3 percent. Together with federal taxes, the combined burden can exceed 50 percent. At the same time, the top one percent of taxpayers account for up to half of the state's income, which makes the budget vulnerable to stock market fluctuations.
Economists Owen Zidar of Princeton University and Eric Zwick of the University of Chicago, authors of the book The Everywhere Millionaire, argue in a recent New York Times column that a much larger and more stable target for taxation is Proposition 13 itself. By their calculations, Californians pay on average only 0.8 percent in property tax, while in Texas the figure is about 2 percent. If California were to match Texas, total property tax revenue would more than double, and housing prices, by their estimates, would fall by roughly 13 percent.
At the same time, Zidar and Zwick acknowledge that repealing Proposition 13 would not be popular with many voters, since many homeowners would face a significant increase in property taxes. They also emphasize that California's tax base is already narrow, and Proposition 40 would make it even more dependent on a small number of people. The state plans to spend $540 billion in the current fiscal year. "It is impossible to finance the state's needs by relying on a few hundred people, however politically appealing that may sound," the economists wrote.
Former White House economic adviser Laura Tyson and former chief economic adviser to California Governor Gavin Newsom, Lenny Mendonca, warn that billionaires are highly sensitive to inheritance taxes when choosing where to live. According to them, six billionaires who would have paid about a quarter of the expected revenue from Proposition 40 have already left the state before the planned start date of the tax. They also warn that the new, untested method of taxing all assets will trigger a "tsunami of lawsuits" and make the promised funding uncertain.
Instead, Tyson and Mendonca propose raising taxes on capital income, which, in their view, fuels wealth. Among the options they name are higher corporate tax rates, taxation of realized and unrealized capital gains, closing the most obvious loopholes, including the so-called carried interest loophole, and raising inheritance taxes.
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