California voters have rejected a one-time 5% tax on billionaires, while Proposition 42, which prohibits new state taxes on personal property, is expected to pass. Proposition 40 was defeated 52.8% to 47.2%, according to The New York Times.
Proposition 40 would have imposed a 5% tax on individuals living in the state on January 1, 2026, with a net worth over $1 billion as of December 31, 2026. Two competing measures, Propositions 41 and 42, aimed to restrict California's ability to impose wealth taxes. If either passed with more votes than Proposition 40, it would be nullified. Proposition 42, which prohibits new state taxes on personal property, is expected to pass.
The result marks a defeat for advocates of higher taxes on the wealthy. The campaign attracted substantial spending, with committees opposing the tax raising approximately $130 million compared with over $33 million raised by supporters.
Proponents of the wealth tax estimated it would raise about $100 billion over five years, with 90% earmarked for California's Medicaid program and 10% for public K-12 education and community college subsidies. California's nonpartisan Legislative Analyst's Office offered a more cautious projection of "tens of billions of dollars" over several years and warned the measure could reduce annual income-tax revenue by up to $1 billion.
The proposal divided Democrats. While Sen. Bernie Sanders (I–Vt.), Rep. Ro Khanna (D–Calif.), and the California Democratic Party supported it, Gov. Gavin Newsom opposed the measure. He warned in January that "it actually will reduce investments in education. It will reduce investment in teachers and librarians, childcare. It will reduce investments in firefighting and police," and that a "one-time tax does not solve an ongoing structural challenge."
Stanford economists Benjamin Jaros and Joshua Rauh, in a working paper published by the National Bureau of Economic Research, warned that the permanent loss of income-tax revenue from billionaires leaving the state could outweigh any one-time windfall, leaving California with a net loss of $38.9 billion. They created 100,000 simulations, and in 85% of them, the tax ultimately cost the state more revenue than it generated.
Wealth taxes have been tried in Western Europe. In the early 1990s, roughly half of Western European countries imposed them; all but three have since repealed them, citing capital flight, reduced investment, high administrative costs, and disappointing tax revenues.
Analysis
Why This Matters
- California's rejection of a wealth tax and move to ban it could influence other states considering similar measures.
- The outcome signals voter skepticism toward taxing wealthy individuals, even for popular programs like Medicaid and education.
- The debate over wealth inequality and taxation is unlikely to end, with advocates likely to seek other avenues.
Background
Wealth taxes have been implemented and largely abandoned in Western Europe due to concerns about capital flight and revenue shortfalls. California's Proposition 40 was part of a national conversation about taxing the ultra-wealthy to fund social programs. The state has seen at least seven billionaires leave, including film director Steven Spielberg, Google co-founders Larry Page and Sergey Brin, Uber co-founder Travis Kalanick, and PayPal co-founder Peter Thiel.
Key Perspectives
Supporters of Proposition 40 (including SEIU United Healthcare Workers West, Sen. Bernie Sanders, Rep. Ro Khanna, California Democratic Party): Argued the tax would raise substantial revenue for healthcare and education, and that higher taxes on the wealthy can improve lives.
Opponents (including Gov. Gavin Newsom, California Medical Association, California School Boards Association): Warned the tax would drive away wealth and investment, reduce income-tax revenue, and provide an unstable funding source. Gov. Newsom said it "will reduce investments in education... firefighting and police."
Stanford economists Benjamin Jaros and Joshua Rauh: Found in 85% of simulations the tax would cost the state more revenue than it generates, leading to a net loss of $38.9 billion.
What to Watch
- Whether other states or the federal government pursue wealth tax proposals in the wake of California's rejection.
- The impact of Proposition 42's passage on future state tax policy.
- Continued movement of wealthy individuals out of California and its effect on state revenues.
Checked
12 claims in this story checked against 1 source: 12 supported.
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- SupportedCalifornia voters rejected Proposition 40, the proposed billionaire wealth tax.Reason Magazine: “California voters have rejected Proposition 40, a proposed one-time 5 percent tax on billionaires.”
- SupportedThe New York Times reported that 52.8% opposed Proposition 40 and 47.2% supported it.Reason Magazine: “52.8 percent of voters opposed the measure, with 47.2 percent supporting it, according to The New York Times .”
- SupportedProposition 42 prohibits new state taxes on personal property and is expected to pass.Reason Magazine: “Proposition 42, which prohibits new state taxes on personal property, is expected to pass.”
- SupportedProposition 40 would have imposed a one-time 5% tax on people living in California on January 1, 2026, whose net worth exceeded $1 billion as of December 31, 2026.Reason Magazine: “Proposition 40 would have imposed a 5 percent tax on individuals who lived in the state on January 1, 2026, and whose net worth is over $1 billion as of December 31, 2026.”
- SupportedCommittees opposing the tax raised approximately $130 million, compared with over $33 million raised by supporters.Reason Magazine: “Committees opposing the tax raised approximately $130 million, compared with over $33 million raised by supporters.”
- SupportedProponents estimated the tax would raise about $100 billion over five years, with 90% for Medicaid and the remaining 10% for public K-12 education and community college subsidies.Reason Magazine: “Proponents of the wealth tax estimated that it would have raised about $100 billion over five years. Ninety percent of this money would have been used to "protect or enhance" California's Medicaid program”
- SupportedThe Legislative Analyst's Office projected “tens of billions of dollars” over several years.Reason Magazine: “California's nonpartisan Legislative Analyst's Office offered a more cautious projection of "tens of billions of dollars" over several years.”
- SupportedThe Legislative Analyst's Office warned that the measure could reduce annual income-tax revenue by up to $1 billion.Reason Magazine: “The office also warned that the measure could reduce annual income-tax revenue by up to $1 billion.”
- SupportedNewsom warned, “it actually will reduce investments in education. It will reduce investment in teachers and librarians, childcare. It will reduce investments in firefighting and police,”Reason Magazine: “He warned in January that "it actually will reduce investments in education. It will reduce investment in teachers and librarians, childcare. It will reduce investments in firefighting and police,"”
- SupportedNewsom said, “a one-time tax does not solve an ongoing structural challenge.”Reason Magazine: “and that a "one-time tax does not solve an ongoing structural challenge."”
- SupportedStanford economists Benjamin Jaros and Joshua Rauh warned that the tax could leave California with a net loss of $38.9 billion.Reason Magazine: “Stanford economists warn that the permanent loss of income-tax revenue from those departing billionaires, which they say has wiped out nearly 30 percent of California's potential tax base, could outweigh the one-time windfall, leaving California with a net loss of $38.9 billion.”
- SupportedJaros and Rauh created 100,000 simulations, and in 85% of them the tax cost the state more revenue than it generated.Reason Magazine: “Benjamin Jaros and Joshua Rauh created 100,000 simulations, and in 85 percent of them, the tax ultimately costs the state more revenue than it generates.”