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I’ve fallen behind on regular blog posts and this one will be longer than usual. It is on the California Prop 40 proposal for the 2026 Billionaire Tax Act. I’m not taking a position on it here, but raising some policy considerations about this proposal that calls for a one time tax to address funding shortfalls in California primarily for health care.
I’m looking forward to participating in an “anti-debate” on this proposal with Jenny Stefanotti and Professor Brian Galle on Tuesday October 27 in the evening at The Commons in San Francisco – click here for info. And thanks to Stephanie Lepp for the anti-debate concept.
Here goes on some background and thoughts on ways to understand and evaluate this tax proposal …
First, no doubt California and other
states face budget challenges due to cutbacks in federal funds for health care.
No doubt, existing tax systems were not designed with billionaire level wealth
in mind that can enable the very wealthy to have moderate income levels, borrow
against their wealth for living expenses and pay a small percentage of their
wealth in annual taxes. Thus, in recent years in the US and other countries,
some attention has been given to various forms of wealth taxation.
The proposed tax base on the 2026
Billionaire Tax is different relative to other taxes. It is not an income tax
based on annual earnings less some deductions, it is not a sales tax based on what
you pay for goods, it is not an excise tax based on what a seller or
manufacturer charges for something, it is not a property tax measured by the value
of property (ignoring any debt). Instead, it is a one-time “excise tax imposed
for tax year 2026 on the activity of sustaining excessive accumulations
of wealth by applicable individuals with net worth of one billion dollars
($1,000,000,000) or more, and on applicable trusts.” [Secretary of
State info] The proposed new tax is measured at the valuation date
(12/31/26) and imposed on individuals and trusts at the tax obligation date
(1/1/26).
Funds generated are primarily for health care spending (90%) and food
assistance and education (10%) + funds needed for FTB to administer this
complex new tax. The tax dollars go into a special fund rather than the general rund.
Chapter 2 of the Act defines “net
worth” and how to measure it and is the longest part of the Act with special rules
for the effect of debt, what is not included such as real property, valuation
methods which is particularly relevant for assessing hard to value items such
as a non-publicly traded company, certain exemptions such as for up to $5
million of “other assets” including art and collectibles, FMV can’t be less
than insured value, exclusion for tangible personal property located outside California
for at least 270 days during 2026 unless it was relocated temporarily with a
substantial purpose of avoiding the tax. Consider the work needed by billionaires,
their tax advisers and the FTB to figure out whether tangible personal property
moved outside of CA in 2025 or 2026 was relocated to avoid the new tax. How
would a property settlement of a billionaire who divorces in 2026 with the
spouse taking personal property outside of CA be treated?
Some observations: