Billionaire Tax: No Relief Guaranteed
California's proposed 5% tax on billionaires may fund health and education, not cut average tax bills
A proposed billionaire tax in California, known as Proposition 40, is set to go on the 2026 ballot, which would impose a one-time 5% tax on individuals with over $1 billion in certain assets. However, experts warn that this tax may not directly lower tax bills for average taxpayers.
The revenue generated from a billionaire tax would need to be allocated by lawmakers to provide tax relief, and there is no guarantee that it would be used to reduce tax rates or create new deductions or tax credits. In fact, Proposition 40 in California would likely fund health and education programs with no direct household tax reduction built in.
Washington state has already passed an income-based millionaire tax, which takes effect in 2028, with a 9.9% tax on income over $1 million. However, experts say that the allocation of the revenue and potential benefits to ordinary households depend on how lawmakers choose to use the funds.
According to Joseph M. Favorito, a certified financial planner, a wealth tax may not generate the expected revenue or produce tax relief. S. Brandon Kress, a certified public accountant, notes that a billionaire tax can take several forms, including targeting net worth, unrealized appreciation, income above a threshold or minimum effective tax calculations.
Annette Nellen, a tax professor at San Jose State University, thinks of billionaire taxes as 'wealth taxes' that tax either assets or income. She explains that merely enacting a billionaire tax would not directly reduce what an average taxpayer owes, and that lawmakers would need to reduce a tax rate or create new deductions or tax credits to provide tax relief.
## Why it matters The concept of a billionaire tax may seem appealing, as it promises to make the wealthiest Americans pay more, potentially benefiting other taxpayers. However, the reality is that the revenue generated from such a tax would need to flow through a legislative budget process, and may appear as a program, a credit or a deficit reduction, rather than a direct tax reduction for ordinary households. As such, it is essential for lawmakers to carefully consider how to allocate the revenue to ensure that it benefits those who need it most.
