Californians will decide this November whether to impose a historic one-time wealth tax on billionaires. If they are successful, proponents hope to launch similar efforts across the country to tax the wealth of the ultra-rich.
Passage of Proposition 40 would enact the first state-level wealth tax, which the ballot measure’s backers, including socialists, see as a trial for wealth taxes in other states and at the federal level. Some on the Left have long been pushing for wealth taxes on billionaires and are hoping that this California referendum could boost the broader movement.
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The ballot initiative would impose a one-time tax equal to 5% of the accumulated wealth of affected taxpayers. Essentially, if a California taxpayer’s taxable assets, including stocks, homes, artwork, and more, are worth more than $1 billion, the state would impose a tax equivalent to 5% of that wealth.
Six Nobel Prize-winning economists wrote an open letter arguing that the move could “kickstart” a movement for higher taxes on the wealthy across the U.S. The economists — Daron Acemoglu, Abhijit Banerjee, Peter Diamond, Esther Duflo, Paul Krugman, and Joseph Stiglitz — have all supported taxing the wealthy more.
“California is the right place to take this historic step,” the group wrote in the letter of support.
“If the state that houses some of the country’s most powerful billionaires votes to tax their wealth, it will kickstart a movement to tax ultra high-net-worth individuals in other states — and eventually at the federal level and in other countries,” the group said. “As Californians head to the polls, their vote may well come to be seen as a turning point in the battle between democracy and oligarchy.”
Likewise, Sen. Bernie Sanders (I-VT) has called Proposition 40 “a model that should be emulated throughout the country.”
Ryan Young, a senior economist at the Competitive Enterprise Institute, told the Washington Examiner that if such a wealth tax were expanded to a national level, it could cause billionaires to shift not just out of California but out of the country.
“Mexico might benefit, Canada might benefit, maybe some tax shelter as in the Caribbean if there’s room,” Young said.
Republicans are vehemently against such a plan, and many Democrats have come out against it as well, most notably Gov. Gavin Newsom (D-CA).
Jared Walczak, vice president of state projects at the Tax Foundation, told the Washington Examiner that the tax would capture virtually all assets of billionaires, including, controversially, ownership stakes in closely held or private businesses, which makes valuations challenging.
“Potentially paying that tax would require either liquidating a significant share of a closely held or pre-IPO business, or letting the government effectively put a sort of lien on it,” Walczak explained.
Newsom, a Democrat seen as a possible 2028 presidential front-runner, has argued that such a law would cause billionaires to move to other states, which would hurt the economy and tax base.
“Over the years, you would see a significant reduction in taxes because taxpayers will move, and that is what I fear at a state level,” Newsom said.
Still, Proposition 40 attempts to correct for that by making it retroactive and applying to all taxpayers residing in the state as of Jan. 1. But Walczak said making the tax retroactive raises constitutional questions.
“Many observers, myself included, believe that the retroactive elements would not hold up in court,” he said. “So billionaires who leave sometime this year would likely be able to avoid some or all of their tax liability, even though the measure is designed to disallow that.”
If the ballot initiative passes, and billionaires are soaked, all of their revenue would go into what is being dubbed a Billionaire Tax Reserve Fund. The proceeds would fund Medi-Cal, which is California’s Medicaid program, and similar healthcare programs for low-income Californians.
Lots of money has already been thrown around in support of and against the ballot measure. Service Employees International Union-United Healthcare Workers West has been the ballot initiative’s biggest supporter.
Over $200 million has already been raised in support and opposition, with the bulk of that coming from opponents of Proposition 40.
Opponents have raised, so far, $187 million against the proposition, and supporters have raised $32 million so far, according to the Los Angeles Times.
There are also two other ballot initiatives in place designed to thwart the wealth tax. Proposition 41 would, if both measures pass, essentially nullify Proposition 40 if Proposition 41 gets more votes than the former.
Likewise, Proposition 42 would ban new taxes on personal property, retirement accounts, intellectual property, and more, while limiting lawmakers from imposing or raising taxes retroactively. So if they both passed and Proposition 42 got more votes, it could also nullify the billionaire tax.
“The billionaires take and take — tax break after tax break — and now they’re spending that money to deceive voters and avoid paying their fair share,” SEIU-UHW chief of staff Suzanne Jimenez said.
Notably, while the tax would be a one-time levy, critics contend that it would be a foot in the door for more taxes on the wealthy down the line. For instance, critics recently released an ad declaring that “when the money runs out, Sacramento will be back with yet another tax.”
Another one of the questions about the tax comes down to valuations and how the tax liability of these handful of billionaires will be calculated.
Instead of the state hiring a squad of assessors for the California Franchise Tax Board, the billionaires themselves would be responsible for the value of their possessions and private businesses. The taxpayers would be forced to hire appraisers, and then the FTB would decide whether to accept or reject that valuation.
And if the board thinks the valuation is wrong, there can be a big penalty. The penalty would be 20% for an understatement of tax liability that exceeds $1 million and 40% for an understatement of liability that exceeds the greater of $10 million.
Certified appraisers could also be on the hook, too. If substantial underpayment is attributed to a certified appraisal, the board could impose penalties at 2% or 4% of the understatement of tax, according to the Tax Foundation. Walczak said that penalty could be “near ruinous” for the appraiser.
Despite the criticisms, the California Democratic Party has backed the ballot proposal, a decision that came from a narrow vote by the party’s executive board.
“Every endorsement we make is earned, not given,” state party Chairman Rusty Hicks said. “California Democrats take a deliberative approach to our endorsement process that puts our values first and ensures our members have a meaningful voice in shaping the future of our state.”
But polling in the Golden State shows that supporters of Proposition 40 are in an uphill battle.
Fewer than half of likely voters, 45%, said they support the ballot measure, according to the University of California, Berkeley, Citrin Center for Public Opinion Research-Politico poll from September. That is a decline from February.
“The trend in Prop 40 is certainly going against Prop 40,” Jack Citrin, a UC Berkeley political science professor and co-director of the poll, told Politico. “From a historical point of view, you’d think the no side are gaining and would potentially win.”
Bettors in prediction markets see passage as unlikely. Kalshi has the implied odds of Proposition 40 failing at 74%.
The wealth tax push comes as some lawmakers at the federal level support their own taxes designed to soak the rich.
Sen. Elizabeth Warren (D-MA) proposed a plan that would impose a 2% annual tax on the net worth of households and trusts valued at over $50 million. Additionally, it would impose a 1% annual surtax on the net worth of households and trusts over $1 billion.
The legislation, dubbed the Ultra-Millionaire Tax Act, is being led in the House by Reps. Pramila Jayapal (D-WA) and Brendan Boyle (D-PA). According to the lawmakers, the new tax would affect some 260,000 households in America, or the top 0.15% wealthiest households.
To prevent high-net-worth taxpayers from leaving the country to avoid paying taxes, the legislation would establish a 40% “exit tax” on anyone who renounces citizenship to dodge the new levies.
And even more similar to the California proposal, Sanders and Rep. Ro Khanna (D-CA) introduced legislation that would impose a 5% annual wealth tax on just under 1,000 of the wealthiest people in the country.
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The bill provides for wealth distribution and would provide $3,000 direct payments to every individual in a household making $150,000 or less per year and $12,000 to a family of four. The legislation would net $4.4 trillion over the next decade, according to UC Berkeley economists.
The Sanders-Khanna bill would also expand Medicare to cover dental, vision, and hearing for seniors, dedicate funding toward the goal of building and preserving over 7 million affordable homes, establish a $60,000 minimum annual salary for public school teachers, and make it so that families don’t pay more than 7% of their income on childcare, according to the authors.
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[ H/T Washington Examiner ]
