Supporters of a wealth tax could not have asked for a better political environment. Democrats won their first Senate election in Kansas since Franklin D. Roosevelt was on the ballot, swept every statewide office in Texas from governor to land commissioner and could even knock off a Republican senator in Mississippi. “No trillionaires” was a potent applause line for Democratic candidates across the country.
And it still does not appear to have been enough to get California voters to approve a wealth tax. Proposition 40 is losing by about 10 points, with nearly two-thirds of the vote counted as of Friday. Proposition 42, a competing ballot measure that would prohibit new state wealth taxes and retroactive taxes, is on track to pass.
The supposedly one-time 5 percent tax on wealth over a billion dollars was regarded as the ultimate test of progressive tax policy and a model for other states. “California is an ideal place to test this idea,” wrote Emmanuel Saez and Gabriel Zucman, two French economists who supported the initiative. They cited California’s concentration of wealthy individuals and the state government’s hunger for revenue.
California Democrats generally have no qualms about taxing the rich. The Golden State already has the highest top state income tax rate of 13.3 percent, which when combined with the federal rate means rich Californians are already paying European-level taxes. The California income tax is so progressive that the top 1 percent of earners pay an average of 45 percent of the tax.
The threat of the wealth tax prompted several billionaires to move away before the vote, which means the state is going to lose significant recurring revenue. Proponents claimed the wealth tax could rake in $100 billion, but more credible estimates said it would raise closer to $30 billion. Billionaires currently pay between $3.3 billion to $5.8 billion a year in state income taxes, according to an October working paper from the National Bureau of Economic Research. This means, if Proposition 40 passed, the present value of permanently lost income-tax revenue would more than wipe out the one-time tax proceeds.
When voters started to understand these realities, and the polling turned against the measure, Sen. Bernie Sanders (I-Vermont) cried foul, criticizing billionaires’ spending for tainting the results. Did he really expect them to do nothing while he bragged about taking 5 percent of everything they own?
It isn’t as though spending determines election results, as Tuesday’s elections elsewhere proved. Elon Musk, the world’s richest man on paper, spent more than anyone ever has in a single election cycle, backing Republicans who got slaughtered. If California voters were bothered by billionaires’ activism, they could have told them to take a hike just like Texas voters did to Musk.
Scapegoating billionaires also elides wealth tax proponents’ failure to organize their own side. The push for the tax was led by health care union leader Dave Regan, who is polarizing within the California left. Outgoing Gov. Gavin Newsom (D) opposed the initiative, as did his soon-to-be successor, Xavier Becerra (D), who had 65 percent of the gubernatorial vote as counting continued on Friday.
Five Democratic state senators and 17 Democratic assembly members went on the record against the initiative. Planned Parenthood affiliates, the California Teachers Association, the California/Hawaii NAACP and the San Francisco Democratic Party all urged Californians to vote no. Either all of these Democrats and Democratic-aligned groups were bought off by right-wing rich guys, or this was a poorly designed policy that failed to win over many of the people who might otherwise be most amenable to it.
Some opponents, such as Newsom, said they want a federal wealth tax instead. If it can’t pass in California, it can’t pass nationally. And a federal wealth tax would require a constitutional amendment, meaning it would need approval from two-thirds majorities in both chambers of Congress, plus 38 states.
Wealth taxes penalize the accumulation of capital, which is one of the keys to economic growth. An entrepreneur could owe the government millions or billions based on unrealized gains. That creates pressure to sell assets to pay the tax and gives founders one more reason to build their company somewhere else.
The track record of wealth taxes is so rough that even most European countries that have tried them repealed them. There’s no reason for America to relearn this lesson through bitter experience. But Rep. Ro Khanna (D-California) seems committed to doing so, saying on Tuesday night that he would be “first in line supporting this in the next election cycle if it doesn’t pass this one” – not really the spirit of democracy. Khanna’s pitchfork populism isn’t exactly inviting billionaires to move back, let alone the next generation of founders.
The good sense of California voters to not actually implement the tax will limit the damage. But from now on, any Californian with a potential billion-dollar idea has to keep in mind that a chunk of his or her future wealth is never more than one election away from being confiscated. Wealth tax advocates were poorly organized this time, but they’ll learn and regroup. Counting on them to never get their act together is a risky bet.
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