Come November 2026, Californians will vote on Proposition 40, which seeks to impose a one-off 5% tax on the net wealth of Californians worth more than US$1bn. It will only require a simple majority at the ballot box to usher in one of the most profound changes to the tax landscape in the US.
According to tax legal scholar David Gamage, one of Proposition 40’s proponents, the tax is a straightforward response to President Donald Trump’s ‘One Big Beautiful Bill Act’, passed last year, that the professor of law and tax at the University of Missouri says will ‘slash federal support for state-level healthcare programmes’.
‘Many billionaires pay lower tax rates than do ordinary middle-class Californians like nurses and teachers’
‘These large cuts to state healthcare spending taking effect in 2027 are expected to create a massive healthcare crisis in California and other states. This has created a major need for raising large revenues quickly to offset federal spending cuts to counteract or at least alleviate the healthcare crisis,’ he says.
Beyond the ‘ordinary rich’
Gamage says that the tax is not aimed at the ‘ordinary rich’, who might earn high wage and salary incomes and already pay quite high taxes, but ‘billionaires who mostly gain their economic income and accumulate their wealth in ways that escape’ state and federal income tax and most other taxes.
‘Whereas overall effective tax rates on the ordinary rich in California are quite high, overall effective tax rates on billionaires are very low. Many billionaires pay lower overall effective tax rates than do ordinary middle-class Californians like nurses and teachers,’ Gamage says.
‘Prop 40 would raise revenues to offset the upcoming healthcare crisis from those Californians who have benefited the most from California’s booming economy while being the most shielded from its affordability crisis and who currently pay minimal effective taxes,’ he adds.
Broader appeal
Proposition 40 is relevant well beyond California. Governments around the world, facing ageing populations, large deficits and rising inequality, are increasingly looking at ways of taxing wealth rather than income.
‘The collapse of taxation on the very richest individuals and the largest corporations is a global problem’
Robert Carnell, an independent economist based in London, says: ‘Although it might be presented as a one-off in response to Trump’s Big Beautiful Bill, there’s an inevitability around having to look further afield, rather than sticking to standard taxation programmes.’
‘Governments have to find money from somewhere. It’s about where can they get money with the least upset,’ he adds.
Rebecca Riddell, associate director, economic justice, at Oxfam America, which is supporting the initiative, says: ‘The collapse of taxation on the very richest individuals and the largest corporations is really a global problem. Proposition 40 is an important opportunity to tackle inequality in California, which is, in many ways, ground zero for our contemporary gilded age.
‘Our analysis shows that in a single year, the fortunes of the 10 richest billionaires in California went up by 48%, an increase of US$340bn, while many Californians are struggling to afford the basics and live a dignified life, and with the impact of government cuts to services at the federal level,’ she says.
On the move?
Wealth taxes have their critics. Magnus Henrekson, professor and senior research fellow at the Stockholm-based Research Institute of Industrial Economics, draws on the experience of Sweden’s wealth tax that was abolished in 2007, where some taxpayers were forced to sell off assets. ‘That caused enormous resentment among people,’ he says.
Henrekson says that the prospect of billionaires moving out of California to another US state to escape the tax is much easier than a Norwegian billionaire moving to Sweden, as they’d have to live in Sweden for a number of years first to gain the benefit of living in the adjacent country. ‘It’s a much smaller step for a Californian to move to Texas, resulting in the tax base being eroded very quickly,’ he says.
‘It may turn out that the valuation of AI technology is a bubble’
But Darien Shanske, professor at UC Davis School of Law and another supporter of Proposition 40, says the idea that billionaires who have built fortunes in California will then acquire properties in other states to claim residency doesn’t wash.
‘They can’t say that if they spend Christmas on the Nevada side of Lake Tahoe they shouldn’t have to pay the tax. Prop 40 incorporates the holistic residency rule that’s been the rule for Californian income taxes for about 100 years; there are many cases about this. They’re just blowing smoke,’ he says.
Henrekson says that Proposition 40 fails to acknowledge that tech-created wealth may be short term. ‘Their companies are being valued in expectation that they will make enormous future profit. But it may turn out that the valuation of AI technology is a bubble and that most of the highly valued start-ups will eventually be bankrupt,’ he says.
To this, Shanske says: ‘It’s important to understand that this is a tax that’s 1% a year, and a small deferral charge for five years, on assets that are generally publicly valued, as those are the assets that generally make billionaires billionaires.
‘Most of their private assets are in large private companies that are also readily valued; that is what happens every time there is a funding round. For taxpayers with unusually illiquid, hard-to-value assets, there is a special deferral option. It is unclear there are any such billionaires, but we have accounted for the possibility.’
‘The idea that somebody who is a billionaire can’t afford 1% with a little deferral for five years is rather implausible,’ he adds. ‘And, as a matter of tax policy, if one out of 200 cases were challenging, then we address the case; we don’t abandon the entire tax.’
Citing 17th-century French statesman Jean-Baptiste Colbert’s statement that ‘The art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the least possible amount of hissing’, Carnell says: ‘It may upset a few billionaires, but they only get one vote each. At the end of the day, you’re achieving your goose-hissing equation,’ he says.
‘Whether or not you argue that it’s a bad thing because of capital flight, or that it eats into business investment, it’s still going to happen because of the political imperative. It’s almost inevitable at some stage that that this starts to creep in and become more mainstream.’