Proposition 40 Sent Me Back to the Flat-Tax Question

Ron and I would probably pay more under the tax system I keep picturing. I can live with that. If the rate is truly the same for everyone, the rules are plain and the money covers the things we have agreed to pay for together, paying more can still be fair.

Then California’s Proposition 40 put a harder question in front of me. What does "the same" mean when one household lives on paychecks and another can watch stock rise for years without selling it?

I still believe in one rate. I no longer think the rate is the first number we should choose.

The ballot measure that started this

Proposition 40 is not a flat-tax plan. It would impose a one-time tax equal to 5 percent of net worth on billionaires who were California residents on January 1, 2026. The bill would come due in 2027, with an option to spread payments over five years at an added cost.

The California Legislative Analyst’s Office says real estate, pensions and retirement accounts generally would be excluded. Ninety percent of the money would have to support public health care. The remainder would go to education, food assistance and administration. The state could collect tens of billions of dollars over several years, according to the office, while later losing less than $1 billion a year in income-tax revenue if billionaires change their behavior or leave.

The campaign has grown much larger than the tax language. The Associated Press reported on October 9 that opponents had raised more than $300 million, roughly ten times the amount raised by supporters. Nearly a third of the opposition money came from Google co-founder Sergey Brin. Gov. Gavin Newsom, Planned Parenthood of California, the California Teachers Association and most Republicans also oppose the measure. They argue a one-time tax could chase away people whose annual income taxes help fund the state long after the Proposition 40 money is spent.

Supporters answer with the size of California’s health-care needs and the size of billionaire fortunes. A September poll cited by the AP found likely voters closely divided, with 52 percent supporting the measure and 46 percent opposed.

There is another wrinkle. Propositions 41 and 42 could block Proposition 40 if either receives more yes votes. Newsom has endorsed Proposition 42, which would also restrict future taxes on financial assets. A voter can support Proposition 40 and still watch it lose to a competing measure.

Buffett’s secretary was paying tax on a different kind of dollar

Warren Buffett made the fairness problem famous. In 2011, he wrote that his federal taxes amounted to 17.4 percent of his taxable income. The 20 other people in his office paid rates ranging from 33 percent to 41 percent, he said. PolitiFact later rated the basic comparison true.

That did not mean Buffett paid fewer dollars than his secretary. It meant he paid a smaller share of the income being counted. Much of his income came from dividends and long-term capital gains, which were taxed differently from wages. Stock that rose in value but was not sold was outside that income calculation altogether.

Proposition 40 reaches for that unsold value. A conventional income tax does not. A sales tax waits until money is spent. The word "flat" tells us almost nothing until we know which pile is being taxed.

One rate can still protect the first dollars

My first instinct was simple: choose one percentage and apply it to everyone. The trouble is that the first $30,000 in a household keeps the lights on. The millionth dollar does not have the same job.

That does not require a stack of tax brackets. A flat-rate system can leave a basic family allowance untaxed, then apply the same rate above it. The best-known academic flat-tax model, developed by Robert Hall and Alvin Rabushka, includes an exemption tied to family size. The Tax Policy Center describes it as a two-part consumption tax: businesses pay on value added outside wages, while households pay the same rate on wages above the allowance.

A refundable credit could go one step further. If the credit is larger than a low-income family’s tax bill, the family receives the difference. The Congressional Budget Office says refundable credits are why the average individual income-tax rate for households in the lowest fifth was negative 10 percent in 2022, while it was 17 percent for the highest fifth.

Everyone would still face the same marginal rate after the protected amount. Their effective rates would differ because a family needs room to buy food and keep a roof overhead before the common bill arrives. I see that as the guardrail that makes a flat rate workable, not a loophole that ruins it.

A national sales tax alone would turn the burden upside down

If we eliminated income, payroll, property and other taxes, a flat tax on spending might sound like the cleanest replacement. It would also hit families with little money to save.

Lower-income households spend a larger share of what they earn. The Tax Policy Center says an unmodified national retail sales tax would therefore be regressive when measured against current income. The center’s review of a 2005 presidential panel found that a 22 percent sales tax replacing the federal income tax would have shifted about $250 billion a year onto the lower 80 percent of households, in 2006 dollars. A rebate could soften that. It would also require a higher headline rate to raise the same money.

That is the part a promise of "one simple tax" can hide. A lower-income family may owe little federal income tax today, yet still pay payroll taxes, sales taxes, excise taxes and rent that carries the landlord’s property tax. Removing every tax except one changes who sees the bill. It does not make the cost disappear.

We saw a smaller version of that problem while looking at Florida’s Amendment 3. Cutting one line on a property-tax bill does not control the water bill, the insurance premium or the local services that still need money.

The one pot cannot be a blank check

I like the idea of one pot paying for federal, state and local government, medical care for everyone, and Social Security or a public pension. I do not like the idea of Washington deciding each year whether Clermont gets enough for roads, schools or fire service.

The distribution rules would need to be written before the rate. Health care and retirement would need protected shares. State and local governments would need a formula based on population and the people they serve, with added weight for poverty, age, disability and unavoidable regional costs. An independent clearinghouse could move the money. Elected governments would still decide how to spend their share, and the public could see every transfer.

The same law should require a public annual calculation: promised spending, expected tax base, reserve and required rate. If Congress wants to add a benefit or a state wants more money, voters should see the rate consequence. There should be no quiet way to promise more and send the bill to somebody else’s pot.

What would count as income?

This may be the hardest line in the whole plan. If wages are taxed and investment gains are exempt, the Buffett problem survives. If every rise in stock value is taxed each year, people can owe cash on an asset they have not sold, and a private business or a piece of art may not have a clear market price.

A fair plan could tax wages, pensions, dividends, interest, business income and realized capital gains at the same rate. It would then need a rule for very large unrealized gains, perhaps payment when assets are sold or transferred, with interest so waiting does not become a free loan. Publicly traded stock is easy to price. A family business is not. Those differences are administrative facts, even when the rate stays flat.

Proposition 40 chooses the other route for a very small group. It values net worth now and sends a one-time bill. Supporters see the reach as its strength. Opponents see valuation disputes, legal fights and moving vans. Both are describing risks that belong in the decision.

My fairness test

• The first dollars needed for a modest life are protected through a family allowance or refundable credit.
• The same rate reaches work and investment income, with no private doorway for the best-connected taxpayer.
• Health care and retirement promises are funded before optional spending.
• State and local shares move by a published formula instead of a yearly political favor.
• Every household can compare what it pays now with what it would pay after premiums, payroll taxes, sales taxes and property taxes are removed.

I cannot honestly say whether Ron and I would pay more until a plan names the base, the allowance and the services inside the pot. I suspect we would. I would want to see the number on paper, including the bills that disappear, before calling that fair.

That is where Proposition 40 leaves me. A 5 percent rate sounds simple. Then come the questions about what counts, who can move and what happens after the one-time money is gone. A national flat tax would face those same questions on a much larger kitchen table.

Editor written. AI used for spelling and grammar only.