California voters are nearing a decision on Proposition 40, a proposed one-time wealth tax on billionaires. Princeton economist Owen Zidar and University of Chicago Booth School of Business economist Eric Zwick argue that changing the state’s nearly 50-year-old property tax rules could raise more revenue than taxing a small group of billionaires—and make state finances less reliant on the stock market and high earners.
Proposition 13 capped property taxes in 1978
California voters approved Proposition 13 in 1978, limiting property taxes to 1% of assessed value and capping annual increases at 2%. Properties are generally reassessed at market value only when they are sold or substantially renovated. As home prices have risen faster than taxable assessed values, the gap between property values and property tax revenue has widened.
Zidar and Zwick estimate that California homeowners pay an average property tax rate of about 0.8% of a home’s value, generating roughly $100 billion in revenue in fiscal 2025. They argue that Proposition 13 has reduced property taxes’ share of state revenue and left California more dependent on income taxes, particularly taxes on capital gains.
California has the most progressive income tax structure in the United States, with a top marginal rate of 13.3%. Combined with federal income taxes, some taxpayers may face rates above 50%. The top 1% of earners are estimated to contribute as much as half of state tax revenue. That concentration makes receipts sensitive to financial markets: capital gains revenue tends to rise when markets perform well and can fall when they weaken.
California’s property tax rate trails Texas
Zidar and Zwick put the average property tax rate for Texas homeowners at about 2%, compared with roughly 0.8% in California. If California raised residential property taxes to the Texas average, residential property tax revenue could more than double, they estimate, while home prices could decline by about 13%.
In their co-authored book, The Everywhere Millionaire, and related commentary, the economists argue that changing property tax rules could broaden the tax base. More wealthy homeowners with substantial assets but relatively low incomes would contribute, rather than the state relying so heavily on a small number of top earners.
Texas’s higher property taxes have also drawn voter discontent. The state has no personal income tax, but local governments levy property taxes, and residents have complained about the overall burden. California could face its own backlash if Proposition 13’s limits were repealed or substantially loosened, as many homeowners would see significant increases in their tax bills.
Proposition 40’s revenue estimate remains disputed
Proposition 40 would impose a one-time tax equal to 5% of the assets of California residents with net worth above $1 billion. The labor unions backing the measure say it could raise $100 billion to offset federal cuts to health care spending.
Supporters argue that California’s billionaires would retain substantial wealth even after paying the tax, particularly amid the artificial intelligence boom. Opponents warn that the levy could weigh on economic growth and startups, force founders to sell large stakes in their companies, and prompt wealthy residents to move to other states—potentially reducing state revenue over time.
The debate also centers on how the tax base would be defined and whether the measure could be implemented as intended. Laura Tyson, a former White House economic adviser, and Lenny Mendonca, a former chief economic adviser to California Governor Gavin Newsom, say six billionaires who could be affected by the tax have already left the state. They estimate those individuals might otherwise have accounted for about one-quarter of the revenue projected from Proposition 40.
Tyson and Mendonca have also warned that a new tax on total assets has not been tested in practice and could trigger extensive litigation, making the revenue estimate uncertain.
Debate focuses on who bears California’s tax burden
California plans to spend $540 billion in the current fiscal year. Zidar and Zwick argue that relying on a few hundred billionaires is unlikely to meet the state’s fiscal needs over the long term. A broader property tax base could instead spread a greater contribution across hundreds of thousands of wealthy homeowners.
Tyson and Mendonca have pointed to other possible sources of revenue, including higher corporate taxes, taxes on realized or unrealized capital gains, tighter limits on tax breaks such as carried interest, and higher estate taxes.
The Proposition 40 debate is therefore about more than a one-time levy on billionaires. It also raises questions about how California distributes its tax burden and reduces its reliance on a small group of high earners and market-sensitive revenue. Changes to Proposition 13 would affect property tax bills for many homeowners, while Proposition 40’s revenue would depend on the vote and how the measure is ultimately implemented.