The vast inequality of wealth in California is unsustainable and creates hardship for millions of people, contributing to homelessness, a lack of healthcare, poor academic outcomes, crime problems and more. It is driving political and social unrest and should give all of us pause.
One proposal being offered as a potential solution to wealth inequality is a voter initiative billionaires’ tax on November’s ballot — Proposition 40. The idea of taxing billionaires’ wealth is a seemingly appealing way to help close the income gap, and it has populist support. However, as chair of the Senate Revenue and Taxation Committee, I have serious concerns about implementing this tax and believe it could do major damage to California’s budget and economy.
First, the people most impacted by the tax would either leave the state or hire the best attorneys to fight the law in court and delay its implementation. Several of the wealthiest have already left California or have signaled their intention to leave. This means less revenue for healthcare, education, public safety and infrastructure in the long term — if it’s even collected at all.
Second, a tax on wealth could discourage investments in startups, thereby stifling innovation and further damaging both the economy and the state budget. When job creators and companies leave California, it becomes less competitive.
Third, there is strong disagreement regarding how the tax revenue would be allocated. Despite the state’s many needs, Proposition 40 mandates that 90% of revenue is carved out for just one purpose: healthcare services.
And finally, implementing and administering this tax will be both incredibly complex and costly. Just to accurately measure the value of taxpayers’ wealth subject to this tax will require a vast expansion of the of Franchise Tax Board’s resources, and according to the Legislative Analyst’s Office, cost tens of millions every year to manage.
It’s also worth considering that California already has a well-established progressive income tax system. In fact, California has the highest state income tax rate in the nation for the wealthy — an effective 13.3% for incomes of $1 million and above.
This system is in place because over the past two decades, California voters have approved higher income tax rates on the wealthy three times: first in 2004 with Proposition 63, then in 2012 with Proposition 30 and again in 2016 with Proposition 55. Proposition 55, which extended Proposition 30’s higher income taxes on the wealthiest Californians, generates about $10 billion annually to help stabilize the budget and fund core priorities like education.
In short: this system works, has produced much needed revenue, and it is relatively straightforward to implement and oversee. But it’s in serious jeopardy because Proposition 55 is set to expire at the end of 2030. That’s why education, labor, public safety and legislative leaders are lining up to support another November ballot measure — Proposition 3 — which further extends these existing taxes. Putting a first-of-its-kind, one-time, controversial and difficult-to-implement wealth tax on the ballot this year could undermine efforts to pass Proposition 3 by creating confusion for voters. That would be a serious mistake.
The California State Legislature and my committee are examining alternative ideas to reduce wealth inequality. And any tax proposal we pursue should not damage our economy or the state budget.
New tax proposals should also be workable and implementable and should not undermine efforts to renew taxes that have a proven record of success.
A wealth tax on billionaires fails to meet those standards.
State Sen. Jerry McNerney, D-Pleasanton, is chair of the Senate Revenue and Taxation Committee.