Economists say California property tax reform would raise more than billionaire tax

California voters will soon decide on Proposition 40, a ballot measure that would impose a one-time tax of 5% on assets held by residents worth more than $1 billion. Supporters, including the union behind the measure, say it could raise $100 billion in revenue and help offset federal cuts to health spending. But the proposal has drawn warnings from opponents that it could drive wealthy residents out of the state and spark a wave of litigation.

Looming over that debate is an older tax measure: Proposition 13, approved by voters in 1978. It capped property taxes at 1% of assessed value, limited annual increases to 2%, and allowed reassessments to market value only after a sale or substantial renovation. After its passage, the state turned more heavily to income taxes, including capital gains, creating a system where the top 1% of earners account for up to half of state revenue, a volatile base that swings with the stock market.

Princeton economist Owen Zidar and University of Chicago Booth School of Business economist Eric Zwick argue that Proposition 13 is the original flaw in California’s tax structure. In a New York Times op-ed, they wrote that “the original sin underlying California’s tax structure is Prop 13,” and that “getting rid of it would be a more efficient and durable way to make the rich pay their fair share.” They estimate that California homeowners pay an average of just 0.8% tax on their property, generating $100 billion in revenue in fiscal 2025. By contrast, Texas homeowners pay 2% on average. If California matched Texas, residential property tax revenue would more than double, while also easing home prices by about 13%, they added.

Repealing Proposition 13 would be politically difficult, as many homeowners would face large increases. California’s tax base is already narrow, and Proposition 40 would make it even more top-heavy. “It is simply not possible to fund the state’s needs by leaning on a few hundred people, as politically appealing as that may be,” the economists argued. They called for broadening the tax base to include hundreds of thousands of other wealthy people through a reformed property tax.

Other critics of the billionaire tax have raised concerns about implementation and the risk of wealthy residents leaving. Laura Tyson, a former White House economic adviser, and Lenny Mendonca, a former chief economic adviser to Governor Gavin Newsom, wrote in a Project Syndicate column that six billionaires who would have owed about one-quarter of Proposition 40’s expected revenues had already left California before the proposed effective date. They warned that the untested method of taxing all assets would fuel a “tidal wave of litigation.” Instead, they argued for raising taxes on capital income through higher corporate rates, taxes on realized and unrealized capital gains, closing loopholes like carried interest, and increasing inheritance taxes.