In November, California citizens will vote on the Billionaire Tax Act (BTA), a ballot measure that would impose a 5-percent tax on the net worth of citizens with a net worth of $1 billion. If California citizens approve this measure, you can be sure that it will be challenged in the courts. Because the Act conflicts with the California Constitution, it is proposed as an amendment to the Constitution. We should also anticipate challenges to the BTA as a violation of the U.S. Constitution as well.
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The California Constitution caps taxes on certain intangible property at 0.4 percent. The higher tax imposed by the BTA would supersede this cap on taxation of intangible property in the Constitution.
The California Constitution also imposes a limit on total state appropriations. The GANN Amendment, enacted in 1979, limits total state appropriations to the appropriations in the prior year adjusted for the rate of inflation and population growth. The BTA will likely generate revenues in excess of the GANN limit.
The GANN Amendment has proven to be an ineffective limit on total state appropriations in California and would not likely be a constraint on taxes imposed by the BTA. Special interests in California have been successful in exempting state expenditures for education and capital improvements from the GANN limit. In fact, proponents of the BTA have anticipated this issue by proposing the allocation of revenue generated by the tax into a dedicated fund, separate from the general fund.
The BTA will likely be challenged as a violation of the due process clause in the California Constitution, which provides that “a person may not be deprived of life, liberty or property without due process of law or denied equal protection of the laws.” This challenge will likely fail because of the California Supreme Court’s interpretation of the due process clause. This interpretation, referred to as “substantive due process,” sanctions the law if the state can claim legitimate public interest. The creation of a dedicated fund for the revenue generated by the BTA, earmarking those funds for health, education, and food assistance, provides the rationale for approving the law in this substantive due process interpretation.
The term “property” encompasses any benefit to which a person has a claim or entitlement. This broad interpretation of property is especially important for billionaires, for whom intangible property accounts for most of their net worth. Intangible property includes assets such as publicly traded stocks, private equity, and intellectual property (patents and trademarks), voting rights, and dividend rights associated with these shares. It is difficult to see how California can measure, let alone tax these intangible assets.
Like all taxes, the BTA would have unintended consequences. Because much of the net worth of billionaires is in unrealized capital gains, the BTA is really a tax on entrepreneurship. Billionaires use their entrepreneurial skills to launch enterprises with the expectation that these ventures will generate profits over some future time period. Because the BTA taxes unrealized capital gains in these enterprises, it will deter entrepreneurial activity. This is already happening, as billionaires flee California for other states with more business-friendly tax environments. That has diminished the tax base and tax revenues that would have been generated by these enterprises.
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The BTA has already had a negative impact on investment and jobs in California, even before it will be voted on this fall. Passage of the BTA would accelerate this loss in business activity and jobs. In addition to billionaires, passage of the BTA will deprive many California citizens of the rights guaranteed to them in the due process clause.
Despite the many constitutional issues surrounding the BTA, it is likely to be approved by California citizens. But they should be careful what they wish for. The tax is clearly designed to redistribute wealth by taxing the super-rich. But taxation of the super-rich is likely to be followed by taxation of the wealth of a broader group of citizens in the long run. This was the path followed after passage of the income tax. The income tax was first imposed on the super-rich to finance the Civil War. Passage of the 16th Amendment in 1913 granted Congress the legal authority to levy taxes on income from any source.
Most citizens have accumulated wealth in their homes, retirement accounts, and other real and financial assets. A tax on net worth could easily be extended to these forms of wealth as well. That could include a lot of citizens: California has more than a million households with net worth in excess of one million dollars. Across the U.S. there are more than 24 million households with net worth in excess of one million dollars — one in every eleven adults.
The BTA will also likely be challenged in the U.S. Supreme Court as a violation of the due process clause in the U.S. Constitution. The 5th Amendment provides that the federal government cannot deprive citizens of “life, liberty, or property, without due process of law.” The 14th Amendment extended due process rights to the states as well as the federal government. Over much of the 20th century, the U.S. Supreme Court adopted the substantive due process interpretation of these amendments. As a result, economic liberties were subject to a lower standard of judicial review than personal liberties.
However, in recent years, the Supreme Court has begun to interpret the due process clause from an originalist perspective. For the founders, there was no distinction between economic and personal liberties; both are subject to the same standard for judicial review. Just as a person has a right to freedom of speech, religion, assembly, and other personal liberties, he also has a right to work, save, invest, and accumulate property. If he has a right to his person, he has a right to use his faculties in the ordinary business of making a living. Economic liberties are an extension of his personal liberties. The due process clause provides that all citizens have the right to pursue life, liberty, and property, including billionaires. The BTA taxation of the net worth of billionaires is a violation of their due process rights under the U.S. Constitution.
Barry W. Poulson is professor emeritus at the University of Colorado, Boulder, and on the Board of the Prosperity for US Foundation.
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Bob Carlstrom is the executive director of the Prosperity for US Foundation.
Image: Famartin via Wikimedia Commons, CC BY-SA 4.0 (cropped).