The following is a guest blog written by scholars Brian Galle, David Gamage, and Darien Shanske.
Proposition 40, California’s proposed billionaire tax, is a one-time 5 percent levy that addresses a significant one-time emergency, namely the cuts made to the healthcare system by the so-called “One Big Beautiful Bill Act.” We have already explained in some depth how the tax is to work and why it is necessary. We have also posted a Section-By-Section Explainer.
Opponents of the plan continue to raise objections, many of which we have addressed and many of which are quite tenuous. We have tried to reply to each one in at least some depth in a short white paper (links embedded in this post). In this post, our task is to offer a one-stop shop of short responses to these objections, with links to more resources if any reader wishes to go deeper.
Haven’t all the billionaires left?
No. Most have not even pretended to and California residence law would treat those that have tweeted from other states as still California residents for purposes of this tax. This is because longstanding California residency law presumed that California residents stay residents and spending the New Year out of state and writing a mean tweet is generally not sufficient to overcome this presumption (see here and here).
Don’t billionaires pay a lot of income tax?
No. They do not. Billionaires live off their vast assets with little or no salary or need to sell. They pay a very small portion of the California income tax. That is one of the major justifications for a wealth tax.
Won’t this tax hurt investment?
No. Investment is guided by economic fundamentals, not by small taxes on the wealthiest, much less a one-time tax. California has seen more investment flow into the state since the announcement of the billionaire tax proposal than it ever has before. If one wants confirmation by Nobel Laureates in economics, see here.
Isn’t this tax a tax on everyone?
No. The tax is only on billionaires and there is no provision in the ballot measure that permits changing that. The rule that relates to amending the tax permits only narrow changes; it is a common provision because otherwise propositions could not be changed by the legislature at all. Again, the courts have interpreted such provisions as only permitting small changes and taxing everyone would certainly not qualify as a small change.
Won’t everyone have to calculate their assets?
No. All Californians check many boxes as to their status on income tax returns, such as their marital status. All most Californians will need to do is confirm that they are not a billionaire. (See page 5 of the Section-By-Section Explainer).
Isn’t this tax unconstitutionally retroactive?
No. Many taxes have enactment dates at the start of the year the law is passed. The Supreme Court has approved this approach because laws are not generally passed on January 1, and it is rational and fair for legislatures to pass laws that they want applied to the current year. Indeed, the Court has approved taxes that are even retroactive to the previous year. Proposition 40 only applies to the current tax year.
Won’t this tax be hard to pay for some illiquid billionaires?
No. This tax can be paid in 1 percent installments (with a small interest charge). And this tax can be deferred until there is liquidity if the taxpayer is truly illiquid. For more on the theory behind the deferral approach, see here.
Is there some rule in the tax that will pose challenges for founders with control shares?
No. There is not. All shares of public entities will be valued at fair market value based on the percentage of the real economic value owned by the shareholder. Claims to the contrary are based on taking a special anti-abuse presumption that applies to private companies and reading it out of context.
What about Propositions 41 and 42?
These initiatives were put on the ballot at the last minute by billionaires and have appealing seeming veneers (protect retirement, more accountability) but actually contain poison pills meant to undermine the billionaire tax. Note that not only are these measures deceptive as to the billionaire tax but they do not even advance their ostensive policy goals (e.g., retirement savings is not under threat). Furthermore, the way these measures are drafted puts lots of other policy initiatives in danger.
In the end, there is no way that we could respond to every claim that can be projected by the vast billionaire microphone.
So we would ask interested citizens to hold on to their common sense: a billionaire tax that loses money, can that be right? Of course not. (See here for the California Legislative Analyst’s Office’s agreement). We would ask interested citizens also to consider why their common sense is being assaulted in this way. It is because the policy fundamentals of this proposal are solid.
