California billionaire tax faces likely defeat as Democrats plan federal tax hikes

California's Proposition 40, a one-time 5% wealth tax on residents worth more than $1 billion, appears headed for defeat after 56% of voters cast ballots against it in the November 3 election, with votes still being counted. The measure required a majority for approval, and election experts say a defeat is likely.

Two competing ballot measures designed as poison pills — Proposition 41 and Proposition 42 — are also showing majority support. They would limit revenue use and prevent any state taxation of personal assets. If either receives more votes than the billionaire tax, the billionaire tax is defeated.

The Service Employees International Union-United Healthcare Workers West, the healthcare union that sponsored the proposal, all but conceded defeat Tuesday night. The union said it will try again in 2028 unless the legislature acts to "make billionaires pay their fair share."

Proposals to raise taxes on the wealthy fared better elsewhere. In Washington State, voters supported a new "millionaire tax" imposing a 9.9% rate on household income above $1 million a year. In Colorado, a plan to replace the flat 4.4% income tax with a graduated tax with a top rate of 8.4% on income over $1 million is too close to call.

With Democrats now set to control both the House and the Senate, tax experts expect a flurry of new federal proposals aimed at raising taxes on high earners to cut taxes for lower- and middle-income taxpayers.

"It is clear Democrats will try to lower taxes for middle-income households and raise taxes on certain businesses and high-income households," said Howard Gleckman, a nonresident fellow at the Tax Policy Center. "But it is much too soon to know how."

Possible plans include those floated last year by Senators Chris Van Hollen, D-Md., and Cory Booker, D-N.J. Van Hollen's plan calls for a graduated surtax on income above $1 million, starting with a 5% surtax for those making between $1 million and $2 million and rising to 12% for those earning more than $5 million a year. The new top rate would be 49% under the existing 37% top marginal rate. The hikes would be offset by a tax cut for middle- and lower-income taxpayers, creating a new exemption equal to $46,000 for single filers and $92,000 for joint filers. Van Hollen has also proposed increasing the capital gains top tax rate from 23.8% to 35.8%.

Booker's plan is similar but would increase the top rate to 43% and more than double the standard deduction to $37,500 for single filers and $75,000 for joint filers.

Taxing the wealthy has proven popular among Democrats, but pairing tax hikes with tax cuts for lower- or middle-income taxpayers could prove challenging given the deficits, tax experts say.

"A key question is the debate about how much to prioritize further cuts at all, given the revenue needs for the deficit situation and the Democrats' spending priorities," said Garrett Watson, vice president of federal tax policy at the Tax Foundation. He said those priorities include reversing Trump-era tax cuts and expanding spending.

Plans for a federal wealth tax or a tax on unrealized gains could also get more attention. Congressman Ro Khanna, D-Calif., who campaigned for the California billionaire tax and whose Silicon Valley district is home to substantial tech wealth, teamed up with Sen. Bernie Sanders, I-Vt., on what they call the "Make Billionaires Pay Their Fair Share Act." The plan would impose a 5% tax on the total net worth of those worth more than $1 billion. Unlike California's one-time levy, the Khanna-Sanders plan would be an annual tax.

President Trump would likely veto any Democratic tax plan, especially if it takes aim at the Trump tax cuts passed in 2017 and extended and expanded last year. But tax experts say any Democratic plans introduced in the next two years could influence tax policy in the 2028 election and highlight the party's priorities.

"Proposals made in 2027 will shape the direction of policy in the future," the Tax Foundation said in a report. "While their ambitions to raise taxes will be limited by President Trump's veto, these proposals will serve as messaging and discussion vehicles over the next two years on the direction of the tax code."

Source: CNBC Top News.