California voters have rejected a proposed wealth tax, which could have meant a one-time influx of billions for the state but threatened to trigger an exodus of billionaires in the state.
The ballot measure, one of several housing issues Californians considered, is projected by the Associated Press to narrowly fail, with 53% voting against the measure with most votes counted a week after Election Day. Proposition 40 would have created a one-time 5% wealth tax on individuals with a net worth above $1 billion.
The Service Employees International Union–United Healthcare Workers West, which backed the measure, said it could have offset federal funding cuts. It estimated the one time tax could have brought in $100 billion in one-time revenue.
But the measure could have affected about 200 people, and billionaires in the state have put significant money toward fighting it. The California Budget & Policy Center estimates they hold a combined $2 trillion in wealth. Proposition 40 excludes real property holdings from determining an individual’s net worth.
State leaders say tax could trigger some of those wealthy people to flee the state and take their spending with them. The National Taxpayers Union Foundation estimates California could collect $40 billion from the tax. But it could lose $25 billion in other taxes if wealthy people leave.
Gov. Gavin Newsom opposed the measure. “This will be defeated, there’s no question in my mind,” Newsom told the New York Times, as it reported that several wealthy people had begun moving assets out of the state.
Palantir and PayPal co-founder Peter Thiel and Google co-founders Larry Page and Sergey Brin all have reportedly moved some assets to Florida. Voters in that state approved a measure on Tuesday that would reform its property tax system, potentially setting it up to be yet more attractive.
However, Meta CEO Mark Zuckerberg had pledged to remain in California, where he has spent more than $112 million assembling a megacompound in Palo Alto. Earlier this year, Zuckerberg reached an agreement with the Meta board to remain in California regardless of the outcome of Prop 40. He would have faced a potential tax bill of some $12.5 billion if the measure had passed.
A wealth of controversy
Taxes raised by Prop 40 would have gone to health care, education, or food assistance. But the state legislature would have had discretion to determine how those funds are used.
The California Association of Realtors President Tamara Suminski said at an elections forum last month that it opposed the measure. CAR is concerned about the potential loss of tax revenue and the state’s economic competitiveness, she said.
“Prop 40 is just a bad idea,” Jennifer Barrera, president & CEO, California Chamber of Commerce, said at the event. “Billionaires are the individuals who have the ability to move quickly, they have the ability to live outside the state, they don’t have to be in California. And yet they pay a tremendous amount of revenue to our general fund if they’re living here.”
Two other items on the ballot, Proposition 41 and 42 both aimed to block or counter Proposition 40, but their language could have had much broader implications, Barrera said.
But even if Proposition 40 had passed, it would have invited years of litigation, said Joe Bishop‐Henchman, executive vice president at National Taxpayers Union Foundation. Prop 40 applied to all of a California-domiciled billionaire’s holdings across the globe, inviting Constitutional challenges.
And then there’s the matter of actually calculating net worth. Wealthy individuals hold assets that can be hard to value, such as patents, artwork, and stakes in private companies. So, would likely take years of expensive legal process to determine how much to tax them.
“The Franchise Tax Board currently has no infrastructure for valuing these types of assets,” Bishop‐Henchman said. “Valuing these kinds of assets will entail years of costly litigation on both ends and establishment of an extensive and costly administrative apparatus for an ostensibly ‘one-time’ tax.”
Meta CEO Mark Zuckerberg had pledged to remain in California, where he has spent more than $112 million assembling a megacompound in Palo Alto. He would have faced a potential tax bill of some $12.5 billion if the measure had passed.Photo by The Asahi Shimbun via Getty ImagesCalifornians decide other ballot issues
Californians meanwhile also voted on a set of other measures. Voters passed Proposition 1 to authorize California to issue $11.25 billion in bonds to support housing affordability programs. Co-chairs of its organizing campaign Chione Flegal and Ray Pearl called the win “a resounding show of support for affordable housing.”
Voters also approved Proposition 37, which creates a $25 billion loan program for middle-income buyers to purchase new homes. Realtor.com economist Joel Berner said this could be a boon for new home sales. But he cautioned it might not touch the more expensive parts of the state.
“The complicating factor here is that the major California metro areas are short on newly built homes below $1.5 million, and the ballot measure does nothing to address the supply of these homes, only bolstering demand for them,” Berner said.
“Proposition 37 has the potential to help prospective California homebuyers, but only if they can find new homes to buy,” he said.
The California Association of Realtors, a major supporter of Proposition 37, cheered the result.
“This measure will help create more housing, provide low-cost down payment options and give teachers, nurses, firefighters and other hardworking Californians a better opportunity to own a home in the communities they serve,” Suminski said. “We look forward to working with stakeholders to bring Proposition 37 to life and deliver on its promise for California families.”
But, voters rejected the controversial Proposition 45. It would have set timelines on environmental reviews for some projects under the California Environmental Quality Act, or CEQA.
California earned an F grade on the Realtor.com® State-by-State Housing Report Card. It tracks how effectively each state balances affordability and new construction.
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