Don Newsom Refuses an Offer
The SEIU's 2 percent compromise bid on the wealth tax is not even a compromise. It's a statement that the proponents remain highly eager for a wealth tax that could be expanded later.
This past week, the Billionaire Tax Now coalition sent Governor Newsom a letter offering to cut a deal: they’ll pull the 5 percent wealth tax from the November ballot if he backs a 2 percent rate instead. The coalition, led by the union that has been pushing the tax and stands to gain the most from it, framed the lower rate as a “responsible beginning” to collect more revenue for state healthcare spending.
Newsom reacted as Michael Corleone did in the Godfather II when faced with a take-it-or-leave-it shakedown. His office indicated Thursday that the union’s offer did not change his position. Or as Michael Corleone would say, “my offer is this: nothing.”
The coalition's willingness to negotiate reflects a deteriorating position on the ballot proposition. Prediction markets now place the odds of the tax reaching the ballot around 30 percent, down from 90 percent at the start of June. Opposition has come not only from the Governor but from segments of organized labor including the teachers, police, and construction workers union, and even healthcare organizations like the California Medical Association and Planned Parenthood.
California’s ballot process gives the initiative’s sponsors a narrow window to negotiate before the ballot is finalized. If sponsors and state leaders reach a deal, the initiative is pulled and compromise can be enacted as legislation or a budget item instead. The deadline for withdrawal is June 25th.
There are many legal problems with this approach. Newsom would need to corral the Legislature to implement the tax by statute, which raises serious constitutional obstacles. The Billionaire Tax Act as written requires a constitutional amendment, because California caps taxation of intangible personal property at 0.4 percent.
Without the ballot proposition, that cap remains in place. The Legislature could plausibly attempt to relabel the tax as an excise tax, an idea it has floated in bills sponsored by Assemblymember Alex Lee (D-San Jose) including AB 310 (2021-2022) and AB 259 (2023-2024), though never put to the legal test. Alternatively it could pursue a constitutional amendment through its standard two-thirds-majority-plus-popular-vote process. Either path faces significant legal challenges, especially given a very tight six-day timeline.
Revenue Under a 2% Wealth Tax
At 5 percent, proponents projected $100 billion in revenue; we estimated approximately $40 billion after accounting for the departures documented person by person in our report.
The 2 percent offer is eerily redolent of the one that Billionaire Tax Act proponents Emmanuel Saez and Gabriel Zucman built for Elizabeth Warren’s 2019 campaign, as well as Zucman's proposal for a coordinated minimum tax on global billionaires equal to 2 percent of their wealth annually.
We ran the numbers on what a 2 percent rate would mean for California’s fiscal position. Given the current state of departures, we estimate that the wealth tax at this rate would raise approximately between $14 and $27 billion, with a central point estimate of approximately $20 billion.
The $27 billion figure reflects only the departures of the six billionaires that were publicly confirmed before the January 1 residency snapshot, representing a flight of 28% of the wealth base. If additional billionaires managed to leave before the deadline, as our analysis predicts was likely, up to 63% of the wealth base could be eroded. Of course, in theory, billionaires who departed could move back, as at the lower rate, the academic migration elasticities would predict a smaller behavioral response.
But these individuals would have already moved — we don’t think any of them is saying “well we left when we thought the wealth tax rate would be 5%, but now that we know it’s 2%, we’re headed back to the Golden State.” Targeted individuals have been responding for the past 7 months to a high probability of a 5 percent rate going on the ballot.
The negative fiscal effects, specifically income tax losses from departures, do not shrink with this new lower rate, because these taxpayers are gone anyway. California’s billionaires currently pay $3-$6 billion per year in income taxes. If some leave, that revenue disappears. Our research has quantified the net present value of the lost income taxes from the departures, which averages $47 billion over the different scenarios we modeled.
We estimated this central result across 100,000 simulations drawing from the same parameter ranges used in our published report: departure fractions from 28% to 62%, annual tax contributions from $3 to $6 billion, and real discount rates from 1.5 to 4.5 percent.
So cutting the rate from 5 to 2 percent forfeits roughly 60 percent of the upfront wealth tax revenue, while the income tax hole remains unchanged.
At this new 2 percent offer from the SEIU, 99.6 percent of outcomes produce a negative net present value, with a mean loss of $56 billion.
In sum, the 2 percent offer is not a compromise. It is the same policy collecting 40 cents on the dollar for the same income tax hole as the 5 percent rate, since it's highly unlikely to lure back anyone who has left. Most of all, it does nothing to commit the state to not enacting further wealth taxes in the future. In fact, by stating in their letter to Newsom that it is "not the end of the conversation," the drafters in fact invite expansions to be built on top of the suggested 2 percent wealth tax down the line.
Zucman comes up with 2% by saying a 33% tax on an estimated 6% annual capital appreciation is a good place to start; the key point, as Zucman acknowledges and you emphasize, is not the 2% number but the acceptance of a starting point. The California tax advocates probably should have started there, or even lower, since their long-run objective is changing the state constitution so the legislature can increase the number at will later on. This is the same reason Sen. Warren often says "it's only two cents" (i.e., 2%).
Most people know the Federal income tax started out this way, too. A better example might be the Alternative Minimum Tax (AMT), introduced in 1969 targeting 155 high-income households. By 2017, before the Tax Cuts and Jobs Act cut the AMT way back, it covered 5.2 million households.
It's not the number. It's never the number. It's the acceptance of the concept as a starting point.
Thank you for this article. I was under the mistaken impression that the amendment was for sure going to be on the ballot in its present form. I had no idea the the bizarre California process would allow late changes due to renegotiation with the Sponsor. Of the dozens of articles I've read about the matter, this was the first time I encountered this key piece of information and context. Mass Journalism just ain't what it used to be.