Prop. 40’s failure points to the tax California already pays for its wealth: Politics overrun by money

California voters have done right by their local billionaires. They appear to have rejected the wealth tax.

With most ballots counted and almost six percentage points needed as of Wednesday morning, a political fight that garnered national attention has reached an unsatisfactory end for many Californians. In a moment of deep economic angst, as a populist backlash against tech companies and widening inequality grew louder, the ultrarich in California have won — again.

This should not be considered a shock. When Google co-founder Sergey Brin began mobilizing an opposition campaign to defeat Proposition 40, powered by an infinite war chest and not one but two poison-pill ballot measures to cancel it out, this seemed inevitable. Because for all the talk of California being a test case for wealth taxes, the truth is California already pays a tax for its wealth: Our political system is suffocated by money.

The initiative by SEIU-United Health Care Workers West would’ve imposed a one-time 5% tax on the assets that actually create excessive wealth, generating an estimated $100 billion to help backfill federal cuts to Medi-Cal. Since it targeted stocks, bonds and business holdings, it was seen as an act of war. Brin and his allies left nothing to chance, raising $379 million to fight it. 

We won’t need much analysis to identify what swayed voters. The playbook for defeating the tax was simple: Stoke economic fears and confuse Californians. 

Prop. 40’s authors may have even doomed their own campaign with an amendment provision that opponents seized on. If a supermajority — two-thirds of the Legislature — wanted to retool the tax, they could, so long as “the statute is consistent with and furthers the purposes of the 2026 Billionaire Tax Act.” Opponents created ads proclaiming politicians would use this clause to come after our retirement accounts.

It lit up social media. Some Californians are so cynical that they figured seven out of 10 state lawmakers would vote to extend a billionaire tax to people with fewer zeros and commas invested. It also made one of Brin’s countermeasures, Proposition 42, an easy sell. It would bar taxes on personal property and its passage would make it almost impossible to enact a similar tax in the future. It was ahead in the count Wednesday morning.

Ultimately the most persuasive reason to reject the tax was the possibility it would stifle innovation or scare off the companies that anchor the state’s economy. Even worse, it might chase away the owners and executives who control these market-making conglomerates — their tax dollars leaving with them. 

Gov. Gavin Newsom, a presumed contender for president, threw his support behind the “no” camp more than a year ago and started echoing this talking point shortly thereafter. He later said he would welcome a wealth tax at the federal level, even though we all know how that would go — even if it is the correct approach. 

Nevermind that the research on capital flight is largely settled. Earlier this year, I spoke with Cornell University sociologist Cristobal Young, who literally wrote the book on this (it’s called “The Myth of Millionaire Tax Flight: How Place Still Matters for the Rich”). Decades of research show that it is much easier for the ultrarich to threaten to leave than actually do it, Young said. Brin and Larry Page and Peter Thiel did flee, but they are outliers. Study after study, on wealth taxes domestic and abroad, consistently show that taxes don’t compel rich people to move, and certainly not enough to compromise a $300 billion state budget.

Still, their departure fueled a report by the Hoover Institution, a conservative think tank at Stanford University, which suggested California risked income tax losses and would receive far less than what was promised by Prop. 40’s proponents.

The Hoover report also presumed billionaires pay income taxes like everyone else. In 2021, ProPublica received a trove of IRS files on the richest people in America — many of whom would have been affected by Prop. 40. The investigative newsroom uncovered how the ultrarich artificially lower their income and instead derive their wealth through their investments. Billionaires exploit loopholes in the tax code to amass vast fortunes and pay the government as little as possible.

In most instances, their effective tax rate is lower than the people who work for them. Buy. Borrow. Die. That’s what they do.

The little they do pay — the Stanford economists said it was as much as $5.8 billion annually to California’s coffers — represents a fraction of the $123 billion in income taxes the state collects overall. 

If voters weren’t worried Prop. 40 was a slippery slope or would sacrifice the state’s golden goose, then they subscribed to the myriad other critiques: It’s badly written. It’s only for healthcare. It’s socialism.

I didn’t like it, either — for a while. Then the Legislature kicked the can on fixing the state’s budget problem and swiftly killed a Citizens United reform proposed by Assemblymember Chris Rogers of Santa Rosa, mirrored after a novel law in Hawaii to curb political spending.

Suddenly the Prop. 40 battle became a much simpler feud between billionaires and everyone else in California. Opponents were spending hundreds of millions to fight a tax they could afford. Meanwhile, I’m trying to figure out if my wife and I can buy a home and pay for child care on two incomes.

The speed and scale of inequality is intensifying in California and nationwide. A majority of Americans believe billionaires are a threat to democracy, especially millennials and Gen Z. If corporations continue to flood the political sphere with limitless sums of money, the ballot box is one of the remaining places we can register our opposition.

Initial returns this week also suggest Proposition 4 could fail. This was a measure that would have reversed a 1988 ban on financing political campaigns with public dollars. It is the sort of policy that helps reduce the influence of money in politics and empower candidates who are not beholden to the donors that helped them get elected.

Instead, California has once again resurfaced the ironies that define this incredible state. We talk about progress but struggle to deliver it. We dislike what excessive wealth is doing to our state but avoid reining it in. We create world-changing technologies but oppose boundaries that ensure our safety.

California may have the biggest economy of any U.S. state, but that does not make it a lab for innovative policy. It simply means we are home to giant companies and smart people. The issues we like to boast about, such as environmentalism or civil rights, are rife with contradictions and trade-offs.

Prop. 40 should have never been considered a litmus test for wealth taxes. It should not discourage them, either. California voters have backed income taxes on millionaires and high-earners to fund mental health treatment and education over the last two decades. As Young, the Cornell researcher uncovered, those taxes didn’t cause an exodus. Proposition 3, which extends a tax for public school funding permanent, officially passed early Wednesday morning.

If there is a glimmer of hope, it is that Brin and other billionaires stepped into the sunshine. The record spending and attack ads and political gamesmanship was done out in the open. Many Californians took notice, whether they backed Prop. 40 or not.

The state’s billionaires may have avoided this wealth tax, but voters won’t forget how some of the richest people on the planet behaved when fairness was on the ballot.