California billionaires faced down a tax and won new protections for their wealth

In summary

California billionaires put Prop. 42 on the ballot to counter a proposed wealth tax. It passed, creating a new obstacle to future wealth taxes.

The proponents of a California billionaire tax didn’t just lose their campaign to impose a first-in-the-nation tax on wealthy people’s assets. They also appear to have lost a campaign that will make it harder for them to try again in the future. 

Proposition 42, which prohibits new taxes on personal property such as business holdings, intellectual property and financial assets, is leading by a wide margin at 54% with nearly 60% of anticipated votes counted. It was one of two measures that tech billionaires placed on the ballot in an effort to cancel out the wealth tax. 

Its apparent passage puts proponents of Proposition 40 — who have vowed to keep pushing for a tax on the wealthiest residents — at an immediate disadvantage. 

The nonpartisan Legislative Analyst’s Office says Prop. 42 will make it harder for state lawmakers to raise taxes in the future and potentially reduce state revenue, though it’s hard to say how much.

And for the many California Democratic leaders who said they wanted the wealthy to pay more taxes but didn’t like how Prop. 40 was written, Prop. 42 will prevent them from considering a differently written asset tax.

Proponents of Prop. 42, including the public safety unions California Professional Firefighters and Peace Officers Research Association of California, promoted it in digital ads and mailers as a way to protect pensions and retirement accounts from future taxes, though it was primarily bankrolled by billionaires to the tune of $159 million. Even Gov. Gavin Newsom endorsed it.

“These Californians backed the strongest protections available to protect their hard-earned life savings from double taxation,” said Nathan Click, a spokesperson for the Yes on 42 campaign.

Billionaire tax proponents, primarily the Service Employees International Union-United Healthcare Workers West, said the argument was misleading: Prop. 40 never targeted ordinary retirement savings, with the exception of Roth IRA accounts with more than $10 million in them. 

Tax proponents have vowed to try again, despite the roadblock now in their way with Prop. 42, saying on Tuesday night they had started a movement to put the idea of taxing billionaires on the national agenda. 

“We’re going to call out these economic royalists. We’re going to tax them the way they need to be taxed, and we’re going to invest in Medicare for all and free childcare,” said Rep. Ro Khanna, a Santa Clara Democrat who was a lead supporter of the measure.

Prop. 42 bans any new wealth tax, whether created by state law or by a constitutional amendment, which voters must approve. But the ban isn’t permanent: voters could undo it by passing another ballot measure later.

“That’s not set in stone,” said Lorena Gonzalez, president of the California Labor Federation. “We have the ability to change things.” 

But despite supermajorities of Democrats in both houses of the state Legislature,  lawmakers have never seriously considered taxing assets. In a handful of times progressives have tried to do so since 2020, the proposals never even made it out of a committee.

California has faced four consecutive years of deficits despite revenue growth, leading to healthcare cuts, suspended payments to schools and tax increases. Federal cuts to Medicaid will also put pressure on Gov.-elect Xavier Becerra from patient advocates and health workers who say the state should backfill the losses. Becerra has said he’s open to new taxes, but he opposed the billionaire tax.

Some Democratic legislators have repeatedly argued that the Legislature should raise revenue by closing corporate tax loopholes and other tax measures, though Republican lawmakers argue that out-of-control spending is the issue. 

Senate Budget Committee Chair John Laird, a Santa Cruz Democrat, said he’d never imagined a scenario where Prop. 42, designed solely to offset the billionaire tax measure, would pass on its own.

Laird said he does not expect an immediate effect on the state budget.

“We will want to just drill down to see if it has any unintended consequences on the budget, but I think we still have to make that determination,” he said Wednesday.

Click said Prop. 42 is narrowly tailored and leaves lawmakers and voters plenty of other tax revenue options to choose from, such as taxes on business sales, corporate income, healthcare providers and insurance.

“Existing funding for schools, public safety, roads, healthcare, etc. is untouched by this measure.”

Kayla Kitson, senior policy analyst at the California Budget and Policy Center, raised concerns about a different section of Prop. 42 — one that bans lawmakers from applying any new taxes retroactively, unless the state needs the money to deal with a budget emergency. 

It is common for state and federal lawmakers to adopt a new tax and backdate it to the beginning of a tax year, she noted. The practice helps prevent tax evasion before a new tax takes effect and helps the state raise money quickly in a pinch, she wrote in a September blog post. 

Under Prop. 42, the state could miss out on at least several months of tax revenue in a future scenario, she said.