Proposition 40: A One-Time Tax on Billionaire Wealth

Introduction

Opponents of California’s Proposition 40 — the one-time billionaire wealth tax ballot measure — claim that the tax would impose substantial new burdens on middle-class Californians.¹ These claims are entirely without merit.

As we explain in this article, Proposition 40 is a one-time tax on billionaire wealth and only on billionaire wealth. The principal direct effect on middle-class Californians, if the proposition passes, will be additional funding for the healthcare system on which all Californians rely, helping to offset a healthcare crisis expected to begin in earnest in 2027 as cuts by the Trump administration and the Republican Congress to Medicaid and other healthcare programs take effect.²

Proposition 40’s basic policy rationale and structure should be straightforward to a Tax Notes audience. The cost of the realization rule for income taxation has become increasingly problematic as ever-larger fortunes have accumulated while mostly escaping personal income taxation.³ California’s billionaires face very low effective tax rates, even as California levies the highest state-level income tax rates on the ordinary working rich, and despite the fact that California’s billionaires have benefited enormously in recent years from California’s booming economy and productive workforce.⁴

If Proposition 40 passes, the resulting one-time tax on billionaire wealth will be collected by the California Franchise Tax Board using its existing audit authority along with Proposition 40’s specific examination rules,⁵ subject to understatement penalties based on similar rules in the federal personal income tax and the existing California corporate income tax.⁶ The ways to avoid those penalties — including adequate disclosure of a position having a reasonable basis — should thus also be familiar.

Most taxpayers will not be troubled by the tax, because they will only need to declare that their net worth is below the $1 billion threshold by checking a box to that effect, as taxpayers already do for many other tax-relevant statuses and activities on state and federal income tax returns. And even billionaires need not value their tchotchkes because Proposition 40 includes a combined $5 million exemption for specified miscellaneous assets.⁷

Somewhat more esoterically, but not to California constitutional lawyers, Proposition 40 permits legislative amendments only if an amendment is “consistent with and furthers the purposes” of the act.⁸ The express central purpose of the act is to raise revenue from “a one-time tax on billionaire wealth.”⁹ This amendment provision is included because otherwise the Legislature could not modify even the statutory provisions of the measure to make small corrections. Without this provision, a legislative amendment could take effect only with voter approval.¹⁰ We deliberately drafted the technical tax portion of Proposition 40 as a statute so the Legislature could make purpose-consistent amendments without returning each change to the voters.

Through the Looking Glass — And Back Again

Proposition 40 says the Legislature may amend the act, but only by a two-thirds vote and only if the change is consistent with and furthers the purposes of the act.¹¹ That language is common in California initiatives, so much so that there is more than one California Supreme Court decision interpreting it (such as Amwest),¹² as well as decisions from the California Court of Appeal (such as Shaw).¹³ Importantly, those limits are true restrictions: Amwest invalidated a legislative exemption from an initiative’s rules because it did not further the initiative’s purposes, and Shaw invalidated legislative diversions from a voter-created trust fund because they would have defeated a core purpose of the initiative. Again, the express central purpose of the act is to raise revenue from a one-time tax on billionaire wealth, and it does not grant the Legislature any new powers to make it anything other than that.

We observe further that it has long been the case that the Legislature, by supermajority vote, could tax certain intangible property at 0.4 percent. Indeed, we know this firsthand because we helped draft A.B. 2088, a 0.4 percent annual wealth tax bill authored by then-Assemblymember Rob Bonta (D), and A.B. 310, a wealth tax bill introduced by Assemblymember Alex Lee (D) (neither bill advanced out of a single committee).¹⁴ The supermajority requirement for enacting new taxes or tax hikes makes it nearly impossible to do so through ordinary legislation. Thus, Proposition 40 will not open a new route by which the Legislature can tax ordinary Californians’ intangible property.

Let us now turn to the claim by opponents that “every Californian will have to report all their assets to the state tax board — and don’t you dare miss anything, or you’ll pay a 40 percent penalty.”¹⁵ California taxpayers already certify numerous statuses and answer screening questions when filing their federal and state personal income tax returns. For example: Every federal Form 1040 filer must answer whether the filer received or disposed of digital assets;¹⁶ taxpayers completing Schedule B, Part III, must answer whether they had a financial interest in or signature authority over a foreign financial account, such as a bank account, securities account, or brokerage account, and whether they had specified foreign-trust involvement;¹⁷ and Form 8938 requires a detailed schedule of specified foreign financial assets but only when their aggregate value exceeds an applicable threshold.¹⁸

Proposition 40 similarly requires a California resident individual filing an income tax return to either declare that their net assets were $1 billion or less or, if tax is owed, provide the tax calculation.¹⁹ For Californians who are not billionaires, this merely adds another easy-to-know threshold status box to check, nothing more.

Taxpayers sometimes have more information than tax agencies, especially in cases involving large, complicated businesses. Tax law has therefore long imposed penalties when taxpayers use that informational advantage to underpay tax. The federal 40 percent gross-valuation-misstatement penalty was enacted in 1989 under President George H.W. Bush, and California’s large-corporate-understatement penalty was enacted in 2008 under the Schwarzenegger administration. Tax compliance was once a bipartisan issue. More importantly, Proposition 40’s similar 40 percent penalty applies only to a taxpayer subject to the tax (that is, a billionaire) whose understatement exceeds the greater of $10 million or 40 percent of the tax shown. Importantly, the penalty is 40 percent of the tax understatement; it is not 40 percent of the taxpayer’s assets. A nonbillionaire has no Proposition 40 tax to understate.²⁰

What Is Going On Here?

We concede that one might reasonably object to the tax in the abstract (for example, some might think that wealth should be taxed only on a national level), or some might object to the actual design of Proposition 40 (for example, some might think that the various thresholds should be different). In the end, as to many of these objections, our general response is that they let the imagined perfect be the enemy of an actual, rather good, proposal. Compared with the enormous and destructive federal healthcare cuts that would otherwise go unoffset²¹ — cuts that function like a giant regressive tax — we think that Proposition 40 is a terrific choice. In any case, Proposition 40 is a yes-or-no question on the ballot, and it is up to the people of California to decide.

Yet, the opponents of Proposition 40, perhaps because they sense that their genuine arguments, especially in context, are rather weak and unlikely to persuade California voters, seem determined to run against anything other than Proposition 40 itself. The campaign against Proposition 40 seems determined to make a simple checkbox seem like a scary bureaucratic encounter; make a potential penalty with many antecedents in the law and that can be imposed only on tax-aggressive billionaires seem like a trap for everyone; and make a customary and limited provision intended to allow small fixes in the tax seem like a trick to make it apply to everyone.

And the opposition campaign has put two other measures on the ballot that would seem to confuse voters: Propositions 41 and 42.²² The goals of both are seemingly plausible. Proposition 41 claims it would increase government transparency, and Proposition 42 claims it would protect retirement assets. But we say “seemingly” because California law has no shortage of audit rules, and Proposition 40 itself expressly exempts ordinary qualified pensions and retirement accounts.²³ Because those two propositions did not (to our knowledge) exist in any form before the advent of Proposition 40, it would seem they were created with plausible surfaces designed to hide an implausible poison pill meant to hamstring the billionaire tax. Those two measures could trick some supporters of Proposition 40 into voting for them as well. We have much more to say about the harms that propositions 41 and 42 would impose if they pass, even apart from any impact on, or interactions with, Proposition 40, that we have elaborated elsewhere.²⁴

And thus, the evidence strongly indicates that the opponents of Proposition 40 do not have the courage of their convictions and could deceive voters.

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