Proposition 40, also known as the billionaire tax, is the most contentious fight on Californians’ ballots this November.
The proposal to impose a one-time asset tax on the net worth of the state’s approximately 200 billionaires has divided Democrats, galvanized progressives and sparked fierce pushback from business groups and the state’s wealthy tech sector. Google co-founder Sergey Brin has poured more than $138 million into the campaign against the measure — including two countermeasures, Propositions 41 and 42 — and is among a handful of billionaires who have moved residences or business assets out of the state in an attempt to avoid the proposed tax. In total, opponents have raised more than $205 million to stop Prop. 40, according to campaign finance records.
It would also set up an entirely new system of taxes in a state that doesn’t traditionally tax wealth. That would be challenging to implement and experts say is sure to invite litigation. Here are some common questions and answers about how the measure would work.
How would the state assess the tax?
Aside from local taxes on real estate and some business equipment, California isn’t in the business of valuing and taxing personal property.
Prop. 40 would require the state, within six months, to create a way to assess the value of a wide range of holdings: billionaires’ stock, investment accounts and business interests, but also their art collections, wine vaults, cars and anything else that stores wealth.
“I have a client who has a machine gun collection,” said Jon Feldhammer, a San Francisco tax attorney who said he is advising several clients who would be or believe they could be subject to the billionaire tax.
The definition of wealth and property has to be broad to close possible loopholes, said Kirk Stark, a UCLA tax law professor.
“Otherwise there would be a very simple workaround, which is, if there’s something that’s exempt then you know there would be an incentive to just shift wealth from one form to another,” Stark said.
Ensuring those subject to the tax aren’t underreporting their assets would require the state’s Franchise Tax Board to hire more people for appraisals and auditing, Stark said.
“It can be done,” he said. “But it’s going to take a huge investment of resources to actually pull it off.”
Franchise Tax Board spokesperson Andrew LePage declined to say how many staff the agency would need to implement Prop. 40. Currently, the board doesn't appraise property but sometimes auditors "examine asset values reported by taxpayers to ensure accuracy," he said.
Chris Parker, a former attorney for the tax board who now works as a tax attorney with the firm Baker Tilly, said the board has “no way of knowing anyone’s net wealth.”
Ariel Jurow Kleiman, a tax policy professor at the University of Southern California, doesn’t think the state would have a hard time putting the tax into effect. Stocks, which make up a substantial part of billionaires’ wealth, are easily valued, she said. For more “bespoke” property like art and jewelry, California could look to the Internal Revenue Service’s federal tax on inherited property.
“There are commonsense methods like looking at comparable assets or looking to available markets to see how comps are valued,” she said. “We wouldn't be asking people to reinvent the wheel here.”
Experts do expect disputes over the value of privately held businesses.
Feldhammer said many startup founders have raised money for their companies but haven’t yet sold any products. He criticized the ballot measure for defining a company’s worth as the most recent amount of investment money it raised, which diverges from how the IRS calculates an asset’s fair market value for the estate tax.
“How do you value a company that is not on the public market? It doesn’t even have a product yet. It’s not making any money,” he said.
He said he expects clients to mount lengthy legal challenges arguing the law overvalues their business holdings.
“These are people who have oftentimes plenty of wealth to spend on legal fees to put up the best defense money can buy,” he said.
Will billionaires leave?
The campaign against the measure warns that billionaires will flee California, depriving the state of billions of dollars in income tax revenue that helps fund the state budget. Experts say there’s no way to know whether the tax will spark a large-scale exodus.
Joel Slemrod, a University of Michigan economics professor who studies tax policy, said there’s very little evidence to gauge how billionaires could react to California’s tax, partly because the proposal is unique.
California experts considering the tax have looked at wealth taxes in European countries to try to discern the impact of Prop. 40. In 1990, 12 countries had wealth taxes. Today, only four remain. Many countries abandoned them because they were difficult and expensive to implement, according to the Organisation for Economic Co-Operation and Development. But Slemrod said those examples are “not immediately applicable” to Prop. 40 because they differed significantly in design: Tax rates were much lower, they were intended to be permanent and the money was not earmarked for special interests.
“I wouldn’t jump from the evidence we have to California,” Slemrod said.
But one issue that could matter significantly for California, Slemrod said, is that it is much easier to move assets between states than between countries, as sometimes happened in Europe. Spain allowed its provinces to enact wealth taxes and research suggests that rich people changed residences based on tax rates.
Researchers at the Hoover Institution, a conservative policy think tank, conducted an analysis suggesting Californians need not look at history to figure out Prop. 40’s impact. Tax flight has already happened. They estimate that billionaires representing 30% of the tax base have publicly said they have left, lowering state revenue estimates by $60 billion and permanently altering California’s income tax collection.
Feldhammer, the tax lawyer, said “a third to half” of his clients have left the state over the proposed tax. He declined to say how many clients that is. Other tax lawyers told CalMatters that clients who are worth less than $1 billion are also considering moving to avoid limiting their earning potential.
Billionaires who didn’t leave before Jan. 1 would face taxes on their assets anyway; the measure would apply to anyone who was a California resident on that date.
But Feldhammer said he expects people to sue over the measure’s retroactive nature, pointing to two U.S. Supreme Court decisions from the 1920s that held it was unconstitutional to apply the federal estate and gift taxes to assets transferred before those laws were enacted. In 1994, the court ruled that retroactive taxes could be constitutional in certain limited circumstances.
Asked how he’s advising clients who are considering leaving California, Feldhammer said there’s a “reasonable argument that the law may be unconstitutionally retroactive — but to take advantage of that, you’re going to have to leave.”
Would it allow the state to tax my retirement?
If you’re not a billionaire, no.
Even for billionaires, Prop. 40 exempts pensions and individual retirement accounts from the asset tax. There are some exceptions, most notably for Roth IRAs that contain more than $10 million.
Misleading advertisements from opponents claim the tax would allow California soon to eat into retirement savings for average Californians. They’re supporting Prop. 42, which would block the proposed billionaire tax by broadly banning any new taxes on personal property such as investment, retirement and pension accounts. Brin’s political spending group, Building a Better California, put it on the ballot, and unions representing firefighters, police and construction workers support it. (If both measures pass, whichever receives more “yes” votes becomes law.)
Proponents of Prop. 42 say their measure would protect the pensions and retirement accounts of teachers, firefighters and middle-class workers from being taxed before they withdraw the money.
“A new tax on Californians’ retirement and life savings would be devastating,” Robert Gutierrez, president of the California Taxpayers Association, said in a press release.
There are no active proposals to tax those accounts on the ballot or in the Legislature. Lawmakers who have floated such wealth taxes in the past have gotten nowhere.
Still, Brian Marvel, president of the Peace Officers Research Association of California, which supports Prop. 42, denied being deceptive and said it’s “within the realm of realization” for California to tax middle-class workers’ retirement accounts.
“I think it’s more important to be proactive in this area,” he said.
How would the money be used?
Proponents say the billionaire tax is intended to backfill federal cuts to the state’s expansive Medi-Cal health program for low-income residents. State officials project the cuts, enacted as part of President Donald Trump’s 2025 budget bill known as H.R. 1, could amount to $30 billion a year.
The initiative gives the Legislature broad authority to decide how to spend the money. Of the revenue, 90% percent would be put in a special fund for healthcare; the other 10% would be put in a special fund to pay for schools and food assistance like CalFresh, which was also targeted by federal cuts.
If the money is used to keep Californians on Medi-Cal, that could mean spending it on the private health insurance companies that the state contracts with to administer low-income residents’ coverage.
There is some debate over whether the money would actually offset the cuts to Medi-Cal and how strictly the language bars lawmakers from using the money for anything else.
Opponents such as the California Medical Association and Planned Parenthood recently circulated a memo arguing there’s no guarantee the money would replace the federal funding cuts, because the proposition also allows the money to offset state cuts to Medi-Cal. They warn that would allow lawmakers and the governor to use the new tax money to maintain state funding levels for Medi-Cal and free up the state’s general fund to pay for other things.
Lawmakers and governors have in the past used special new funds to simply replace existing funding. Then-Gov. Arnold Schwarzenegger, a Republican, did it with mental health funding created by a voter-approved tax on millionaires, and then-Gov. Jerry Brown, a Democrat, did it with health funding created by the state tobacco tax. More recently, doctors and hospitals accused Newsom of using a different healthcare tax to backfill the general fund. They placed Proposition 35 on the ballot in 2024 to earmark the money. Voters approved it, but the groups say some funding was still diverted.
But proponents of Prop. 40 said that concern doesn’t make sense: Those budget maneuvers, they said, are usually done to address state budget shortfalls, while Prop. 40 was already written to create funding for a shortfall.
This article was originally published on CalMatters and was republished under the Creative Commons Attribution-NonCommercial-NoDerivatives license.
