Several months ago, when Proposition 40 was still in the signature-gathering phase, I wrote a column explaining why the measure did not make sense. As a certified public accountant who has practiced for over half a century, my view is that this measure is not only bad tax policy, but also it would result in significant administrative burdens to collect.
Furthermore, many tax commentators believe the measure would be subject to valid constitutional challenges.
From a tax policy perspective, Proposition 40 would clearly encourage the wealthiest Californians to leave the state. While there is considerable political debate about whether billionaires pay their “fair share” of tax, they undoubtedly already pay a large share of California income taxes that are collected.
The top 1% of taxpayers pay approximately 40% of the state personal income taxes. Plus, if the billionaires move out of state, they will likely take with them their businesses and employees who also pay considerable California taxes.
This last point was explicitly mentioned by the Legislative Analyst.
Several tax commentators have suggested that the proposal violates provisions of the California Constitution.
For example, the tax would be retroactively imposed based on a date prior to enactment of the ballot measure. Furthermore, the tax may apply to certain non-residents who spend part of their time in California or who moved out of state after the effective date but before the tax was enacted.
Under the measure, any constitutional challenges must be filed with the Superior Court of Sacramento within 60 days of the election date.
Moreover, the proposal would create a significant administrative burden for taxpayers, tax practitioners and the Franchise Tax Board.
In my experience, the most complicated and controversial tax issues are usually those that involve valuation matters because the determination of market value is often subjective.
Billionaires typically hold substantial private businesses through complex ownership structures, which are challenging to unravel and place a value upon.
They also frequently own collections of art, vintage automobiles, sports franchises or other exotic asset categories for which there is no definitive market value.
I have dealt with estate and gift tax returns where the taxpayers have spent significant sums establishing the value of estate or gifted assets. Frequently these values are challenged by the tax authorities in a drawn-out process that is expensive for both the taxpayer and the tax authorities.
While Proposition 40 allocates additional funding for the Franchise Tax Board, such funding is inadequate to cover the FTB’s actual costs of administering the tax.
The measure provides rebuttable default values of private businesses which are a multiple of book income, but those values likely overstate the value of such businesses, ensuring controversy with the FTB.
Either the taxpayer or the FTB can override the formula with a certified appraisal by showing clear and convincing evidence that it substantially over- or understates the real value.
Finally, if Proposition 40 passes, the tax would be due on April 15, 2017, giving taxpayers a little more than five months to assimilate the information, prepare and file a tax return. This simply is not enough time. By comparison, estate tax returns are generally due 8½ months after the decedent’s death.
Proposition 40 has two companion measures, Propositions 41 and 42, which were placed on the ballot by opponents of Proposition 40. These propositions neuter much of Proposition 40.
To the extent that more than one proposition passes, the proposition getting the most votes becomes the controlling statute.
The billionaire tax proceeds are exempted from the state spending limits. Among other features, Proposition 41 prohibits the state from enforcing any tax enacted or effective on or after Jan. 1, 2026, that is exempted or excluded from the state spending limit. This would clearly prohibit the state from enforcing the billionaire tax.
Proposition 41 also adds certain state agency audit requirements once certain voter signature thresholds are achieved, and for tax measures that passed, would require state audits every four years to determine program effectiveness and cost-saving measures.
Proposition 42 would provide for two limitations on future taxes. The first would prohibit wealth taxes on retirement holdings, individually owned assets, and other forms of personal savings. The second prohibits retroactive taxes.
I have been a member of the California Society of CPAs since 1978 and I do not recall the society endorsing or opposing any propositions until this year. The society opposes Proposition 40, for the reasons stated above, and endorsed Propositions 41 and 42. I concur with their rationale and conclusions.
Jim de Bree is a semi-retired CPA residing in Valencia.
