(The Center Square) – As the Nov. 3 election approaches, two tax measures California voters will decide on – Propositions 40 and 42 – are generating some talk among economists because the latter could cancel out Prop. 40, known as the billionaire tax.
That’s because Prop. 42 would prohibit new state taxes on personal property, including financial assets like retirement and investment accounts, which is exactly what Prop. 40 aims to do. Proposition 40 is intended to bolster lost federal dollars for public education, food assistance and health care, according to the backers of the billionaire tax.
“Voters consistently support Prop, 40 because this modest, one-time tax on about 250 billionaires will keep local hospitals and ERs open and healthcare affordable for millions of Californians,” Debru Carthan, vice president of Service Employees International Union-United Healthcare Workers West, said in an email sent to The Center Square on Wednesday. “The funds will go to life-saving medical care for seniors, veterans, and families. It will allow millions of Californians to keep their health insurance and not see their premiums skyrocket.”
The tax is meant to generate $100 billion worth of revenue to pay for those programs over the next five years, numbers from the Yes on 40 campaign show. The measure was first introduced by SEIU-United Healthcare Workers West, according to previous reporting by The Center Square.
Wayne Winegarden, an economist with the Pasadena, Calif.-based Pacific Research Institute, told The Center Square on Wednesday that the wealth tax might target the very rich, but the burden of the tax will ultimately impact average Californians.
“I think the largest misnomer we have about Prop. 40 is that it’s a wealth tax only on billionaires,” Winegarden said. “One of the things in economics is you distinguish who physically pays the tax and where the actual burden of the tax is, and the burden is on everyone because you’re messing with the soul of California’s economy.”
In California, the state’s biotechnology, information technology and artificial intelligence industries attracted 90% of all venture capital investment in the country, Winegarden said.
“On average, we get 60% of all venture capital investment. That’s $158 billion,” Winegarden said. “That’s kind of the economic multiplier effect. That’s what kind of helps propel our economy, and the wealth tax attacks that core of what California’s economy is.”
If Prop. 40 passes, Winegarden fears the state could lose 45% of its venture capital investment.
“That’s a huge amount of investment that’s leaving the state,” Winegarden said. “You’re going to see incomes about $1,700 lower than otherwise, and about a quarter million fewer jobs are going to be created. That’s very illustrative of how these taxes will impact the average Californian.”
According to the Voter Information Guide published by the California Secretary of State’s Office, Prop. 40 would levy a one-time 5% tax on California residents whose net worth is or exceeds $1 billion. That tax would apply to investment assets such as businesses, real estate, art, collectibles and stocks.
Prop. 42 would prohibit the establishment of new taxes by the state on those assets, according to the voters' guide. That means that if Prop. 42 and Prop. 40 pass, depending on the margin at which Prop. 42 passes, Prop. 40 could essentially be canceled out. That would happen if Prop. 42 got more votes than Prop. 40.
“Not only would it nullify Prop. 40, but it would prohibit attacks on assets in the future,” said Susan Shelley, vice president of communications for the Howard Jarvis Taxpayers Association.
“We are very strongly in favor of Prop. 42," Shelley told The Center Square on Wednesday. "I don’t think there should be a wealth tax in California, ever.”
Prop. 42, which is backed by nonprofit group Building a Better California, is supported by multiple public safety, blue-collar and veterans’ groups, according to the Yes on 42 campaign.
“Our members have earned their retirement through a lifetime of hard work, and they should not have to worry that new taxes will threaten the financial stability they have built,” Chris Hannan, president of the State Building and Construction Trades Council of California, said in an email to The Center Square. “This measure protects their retirement savings, as well as the savings of all Californians who have planned responsibly for the future.”
