If California matched Texas in property taxes, it would generate more revenue than the billionaires tax.

In 1978, voters approved Proposition 13, which capped property taxes at just 1 percent of assessed value, limited annual increases to 2 percent, and allowed reassessments to market value only after sales or substantial renovations.

This occurred amid a broader tax revolt that led to the election of Ronald Reagan as president and an era of conservative governance in America. After Proposition 13 passed, the state had to find other ways to raise more revenue and relied more heavily on taxing income, including capital gains.

California now has the most progressive income tax structure in the country, with a top marginal rate of 13.3 percent. When federal income tax rates are added, it can push the total to more than 50%.

The richest 1% of earners account for up to half of state revenue, but this also means that state coffers are volatile and dependent on stock market returns. At the same time, the ultra-rich often don’t earn much income and instead leverage their assets to fund their lifestyle, thereby avoiding some taxes.

Now enter the billionaires tax, which requires residents worth more than $1 billion to pay a one-time tax equal to 5 percent of their assets. The union that supports Proposition 40 said the wealth tax could raise $100 billion in revenue and help offset federal cuts in health care spending.

Its supporters point to the AI ​​boom and say California’s ultra-rich would remain among the richest in the world. Opponents have warned of the impact the tax could have on economic growth and startups. They also said it would force founders to sell large shares of their companies and ultimately cause the wealthy to flee to another state, leading to a net loss of revenue over time.

If California is looking for a major source of undertaxed wealth, “a much better and bigger target lies right under its feet,” according to Princeton economist Owen Zidar and University of Chicago Booth School of Business economist Eric Zwick, authors of the book. The millionaire everywhere.

“The original sin underlying California’s tax structure is Prop 13, the 1978 law that rewrote the rules of property ownership,” they wrote in a recent statement. New York Times opinion article. “Getting rid of them would be a more effective and sustainable way to make the rich pay their fair share. »

Proposition 13 also contributed to a rapid increase in home values, which rose faster than property taxes. As a result, California homeowners pay an average of just 0.8% in taxes on their property, Zidar and Zwick estimated, generating $100 billion in revenue in fiscal year 2025.

In contrast, Texas homeowners pay an average of 2%. If California matched Texas, overall residential property tax revenue would more than double, while reducing home prices by about 13%, they added.

To be sure, Texas property taxes sparked their own voter revolt during the midterm election season. Although the state does not levy an income tax, Texans complain that the overall tax burden remains onerous because of property taxes, which are also levied by local governments.

And getting rid of Proposition 13 in California wouldn’t go down well with voters either, as many would face large increases in their property taxes. Yet California’s tax base is already narrow, and Proposition 40 would make it even more burdensome. Meanwhile, the state plans to spend $540 billion this fiscal year.

“It is simply not possible to finance the needs of the state by relying on a few hundred people, no matter how politically attractive that may be,” Zidar and Zwick argued. “For California to tax wealth progressively and significantly improve its fiscal situation, it must broaden its reach beyond billionaires to the hundreds of thousands of other very wealthy people who could easily afford to contribute more by paying a property tax that finally works. »

Laura Tyson, a former White House economic adviser, and Lenny Mendonca, a former chief economic adviser to California Governor Gavin Newsom, have warned that billionaires react strongly to inheritance taxes when deciding where to live.

Already, six billionaires who would have owed about a quarter of the expected revenues from Prop 40 have left the state before the wealth tax’s proposed effective date, they pointed out in a Project Syndicate column.

And since Proposition 40 proposes a new, untested tax method based on all assets, it would fuel a “tidal wave of litigation, making promised funding both speculative and unreliable,” they write.

“Instead of imposing a tax on billionaires, the United States should increase taxes on the capital income that fuels wealth,” Tyson and Mendonca argued. “There are a variety of ways to do this: by raising corporate tax rates; imposing taxes on realized and unrealized capital gains; closing the most glaring loopholes, such as carried interest; and increasing inheritance taxes.”