Proposition 40 would levy a one-time tax on billionaires. Supporters say it would raise money for healthcare and other programs, while opponents warn it could drive wealthy residents and assets out of California
by Jeanne Kuang and Kristen Hwang
Proposition 40, also known as the billionaire tax, is one of the most contentious measures on Californians’ ballots this November.
The proposal would impose a one-time asset tax on the net worth of California’s approximately 200 billionaires. It has divided Democrats, energized progressives and generated fierce opposition from business groups and the state’s wealthy technology sector.
Google co-founder Sergey Brin has poured more than $138 million into the campaign against the measure, including support for countermeasures Propositions 41 and 42. Opponents have raised more than $205 million to defeat Prop. 40.
The measure would also require California to create an entirely new system for taxing wealth. Aside from local taxes on real estate and some business equipment, the state does not generally value and tax personal property.
How would the tax work?
Within six months, California would have to develop methods to assess billionaires’ stocks, investment accounts, business interests and other valuable property, including art, jewelry, cars and collections.
Kirk Stark, a UCLA tax law professor, said the definition of taxable wealth would need to be broad to prevent taxpayers from shifting money into exempt assets.
The Franchise Tax Board would likely need additional employees for appraisals and audits. Some assets, particularly publicly traded stocks, are relatively easy to value. Privately held companies could present greater difficulties and potentially lead to lengthy legal disputes.
Will billionaires leave California?
Opponents warn the tax could prompt billionaires to leave, costing California billions in future income-tax revenue. Experts say it is impossible to know how extensive such an exodus might be.
Several European countries have abandoned wealth taxes because they were difficult and expensive to administer, although economists caution that those systems differed substantially from Prop. 40.
Researchers at the Hoover Institution estimate that billionaires representing about 30% of the proposed tax base have already publicly said they have left California, potentially reducing anticipated revenue.
The measure would apply to anyone who was a California resident on Jan. 1, even if that person subsequently moved. Tax attorneys expect legal challenges over that provision and the measure’s retroactive effect.
Would retirement accounts be taxed?
For Californians who are not billionaires, the answer is no.
Even for billionaires, Prop. 40 generally exempts pensions and individual retirement accounts, although there are exceptions, including certain Roth IRAs containing more than $10 million.
Opponents supporting Prop. 42 argue that broader protections are needed to prevent future taxation of retirement and investment accounts. Prop. 42 would broadly prohibit new taxes on personal property, including investment, pension and retirement accounts.
There are currently no proposals on the ballot or in the Legislature to tax ordinary Californians’ retirement accounts.
If Prop. 40 and Prop. 42 both pass, whichever receives more “yes” votes would become law.
Where would the money go?
Supporters say the billionaire tax would help compensate for federal funding reductions affecting Medi-Cal, California’s healthcare program for low-income residents. State officials project federal cuts could eventually amount to $30 billion annually.
Under Prop. 40, 90 percent of the revenue would go into a special healthcare fund, while 10 percent would support schools and food assistance programs such as CalFresh.
Critics, including the California Medical Association and Planned Parenthood, argue there is no guarantee the money would directly replace lost federal Medi-Cal funding. They say lawmakers could use the new revenue to maintain existing healthcare spending while redirecting other state money elsewhere.
Supporters reject that argument, saying Prop. 40 was specifically designed to provide money to address expected funding shortfalls.
This article was edited and reduced to fit the available space in the print edition.
CalMatters
