Bad luck, lefties: Even if your dumb wealth tax passes, billionaires will kill it in court

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“Don’t tax you, don’t tax me, tax that fellow behind the tree,” is how a U.S. senator once described ideal tax policy.

In California and elsewhere, the most unpopular taxes are the ones most people see, like the gas tax and property taxes. The only popular taxes are the ones paid by someone else.

So Proposition 40 — the “billionaire tax” — and its first-in-the-country wealth tax should be very popular, since only 200 people would pay it. But the polling has it struggling.

If the goal is to tax the rich, a wealth tax is a bad way to do it.

Taxes on the wealthy can cause “fire sales” and job losses. Moreover, “temporary” or “one-time” taxes on a few often become permanent taxes on all. And countries like France and Sweden that tried a wealth tax have repealed it.

Beyond that, most Californians think policy shouldn’t aim to tear some people down but instead focus on a rising tide lifting all boats.

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Another reason California voters should be wary of Proposition 40 is because it will lose in court. Here are six reasons why, and this list isn’t even exhaustive.

First, the tax is retroactive. It would apply to any billionaire residing in California on January 1, 2026, which is in the past. Sometimes tax effective dates can be retroactive, but not new taxes, and not without fair notice to those who might be affected.

The sponsors could allow the date to be rewritten. But voters don’t know what the effective date will be, which raises a question: what are people actually voting on?

Second, the tax violates the Commerce Clause of the U.S. Constitution. Courts interpret the Constitution to prevent states from taxing more than their fair share of interstate activity. Proposition 40 attempts to tax the assets of California residents, even if these assets are in another state — or another country. Non-resident spouses of California residents can also be taxed. In legal terms, this tax is not fairly apportioned.

Third, Proposition 40 contains a rash of arbitrary rules. The Equal Protection Clause protects everyone from laws that have no rational relation to an important government objective. Proposition 40 has a number of irrational provisions, such as crippling penalties on private valuation experts who estimate assets to be worth less than the state tax authorities do.

Fourth, the tax is an attempt to target specific individuals — what legal experts call a “bill of attainder.” The Constitution prohibits such laws, seeing them as unjust punishment of individuals without a judicial trial.

Fifth, Proposition 40 illegally delegates authority to the legislature. While proponents say the tax is only going to target the wealthiest, and only once, Proposition 40 gives the legislature the power to change the rules as it sees fit, regardless of the property tax limit and voter-approval protections of Proposition 13.

Sixth, courts have long upheld a constitutionally protected right to travel. With its retroactive residency snapshot date, Proposition 40 imposes a punishing tax on former residents after they leave the state, and on new residents who move into the state on or before that date.

All this makes Proposition 40 more than an unusual tax proposal. It is a collection of novel and constitutionally dubious provisions that will provoke litigation from the moment it takes effect.

At the National Taxpayers Union Foundation, we fight for taxpayers in the courtroom. Recently, we won refunds in Colorado for taxpayers who paid an illegally increased property tax. Louisiana restructured its archaic sales tax system after we filed a constitutional challenge in court. We’ve sued the IRS for unfair process and excessive data collection. We know when a state tax has crossed the line.

Maryland learned this lesson the hard way. In 2020, Maryland’s legislature passed a first-in-the-country tax on digital advertising. Because it exempted Maryland businesses while taxing out-of-state businesses, legal experts warned it wouldn’t stand up in court.

Two months ago, judges ruled that Maryland violated due process, the Commerce Clause, and the federal Internet Tax Freedom Act. A separate court held it also violated the First Amendment. Maryland must now refund five years of tax collections, plus interest.

California can avoid all of that legal drama if Proposition 40 fails. But if it passes, don’t lose hope. We at NTUF are ready to see the state in court.

Joseph Bishop-Henchman is Executive Vice President at National Taxpayers Union Foundation.