California voters appear poised to reject Proposition 40, a measure that would have imposed a one-time 5% tax on billionaires, according to early results from the secretary of state. The potential defeat marks a significant split between Gov. Gavin Newsom and the Democratic Socialists of America (DSA), which had strongly backed the initiative ahead of the November midterms.
The proposition sought to raise funds to address a projected $100 billion shortfall in federal funding for the state’s Medi-Cal program. While the DSA argued the tax would redistribute wealth from the state's richest residents to fund healthcare and education, critics warned it would trigger capital flight and harm California's economic competitiveness.
What the Left Is Saying
The Democratic Socialists of America (DSA) championed Proposition 40 as a necessary step to fund public services. In materials distributed by its California chapter, the group stated, "We have the money in California to pay for the quality schools and healthcare that we need. It just needs to be transferred from the wrong pockets to the right ones. We can do that by taxing the rich."
The DSA framed the measure as a scaled-up progressive tax, noting it would apply to just 250 Californians who collectively own $2 trillion in wealth. The group argued that because billionaires average a 7% to 8% annual growth in wealth, a one-time 5% tax would "slightly slow down the growth of that wealth" rather than deplete their assets. The revenue was earmarked to direct 90% to healthcare and 10% to education and food assistance.
What the Right Is Saying
Critics of the measure, including Gov. Gavin Newsom, argued that the tax would put California at a competitive disadvantage. Newsom stated, "I don’t think it’s a good idea to do [it] at a state level. It’s a badly written initiative. It focuses just on one part of the state’s budget. It’s one-time money and the impact is already being felt. People have left the state."
Richard Stern, an economics scholar with Advancing American Freedom (AAF), argued that the proposal reflects a misunderstanding of how wealth is held. "The left looks at a billionaire, and they assume that they’re sitting on $10 billion, $100 billion in cash. I hate to break it to them: There’s no cash," Stern said. He noted that wealth is tied up in "a trillion-dollar company" and physical assets like factories and machinery, not liquid cash.
What the Numbers Show
Proposition 40 proposed a one-time 5% tax on assets such as businesses, securities, art, collectibles, and intellectual property. It excluded select pensions, real estate, and retirement accounts. To prevent residents from leaving the state to avoid the tax, the measure was designed to apply retroactively to billionaires who were California residents on Jan. 1, 2026.
The DSA estimated the tax would target approximately 250 individuals. The group cited a projected $100 billion shortfall in federal funding for Medi-Cal as the primary driver for the new revenue. Election results as of Wednesday afternoon show the measure on a path to defeat, while Proposition 42, a countermeasure prohibiting new state taxes on personal property and restricting retroactive taxes, appears on track to pass.
The Bottom Line
The apparent rejection of Proposition 40 highlights the ongoing tension within the Democratic party between progressive socialists and moderate governors like Newsom. While Newsom opposed the tax at the state level, he indicated openness to similar concepts at the federal level, stating, "Looking at that from a national prism, very different conversation than a state-by-state prism."
However, experts like Stern noted that federal implementation faces similar challenges on an international scale, as individuals could potentially relinquish citizenship or move abroad to avoid such taxes. With Proposition 42 likely to pass, California’s legislative landscape is expected to shift toward stricter limits on retroactive and personal property taxes, signaling a potential halt to similar state-level wealth tax initiatives in the near future.