Economists: Killing Prop 13 Beats California's Billionaire Tax

California's property tax rules cost the state more revenue than its proposed billionaire wealth tax would raise, according to economists Owen Zidar of Princeton and Eric Zwick of the University of Chicago Booth School of Business. If the state taxed homes at Texas's average rate, residential property tax revenue would more than double — topping the $100 billion that Proposition 40's backers promise.

California voters will decide on Prop 40 soon. The measure calls for residents worth more than $1 billion to pay a one-time tax equal to 5% of their assets. The union pushing the ballot measure says the wealth tax could raise $100 billion and help offset federal cuts to health spending.

But Zidar and Zwick, authors of the book The Everywhere Millionaire, point to a different target. If California wants a large pool of undertaxed wealth, they wrote in a recent New York Times op-ed, "a much better, bigger target lies right beneath their feet."

What did Prop 13 do in 1978?

Nearly 50 years ago, California voters approved Proposition 13. The measure capped property taxes at 1% of assessed value, limited annual hikes to 2%, and allowed reassessments to market value only after a sale or substantial renovation.

The vote came amid a wider tax revolt, ahead of Ronald Reagan's election as president and an era of conservative governance in America. After Prop 13 passed, the state had to find other ways to raise revenue. It leaned harder on taxing incomes, including capital gains.

That shift produced the tax structure California has today:

• The most progressive income-tax structure in the country, with a top marginal rate of 13.3%.
• Combined federal and state income tax rates that can exceed 50%.
• A budget that depends on the top 1% of earners for up to half of state revenue.

That dependence cuts both ways. State coffers swing with stock market returns. And the ultra-wealthy often report little income, instead borrowing against assets to finance their lifestyles and avoiding some taxes along the way.

How does California compare with Texas?

Prop 13 also shaped the housing market. Home values have risen faster than property taxes ever since. California homeowners now pay an average of just 0.8% of their property value in tax, Zidar and Zwick estimated. That generated $100 billion in revenue in fiscal 2025.

Texas homeowners pay 2% on average. If California matched that rate, residential property tax revenue would more than double, while home prices would ease by roughly 13%, the economists said.

Texas offers its own cautionary tale, however. Property taxes there have stirred a voter revolt during the midterm election season. The state levies no income tax, but Texans complain the overall burden stays onerous because local governments also tax property.

"The original sin underlying California's tax structure is Prop 13, the 1978 law that rewrote the rules of property ownership," Zidar and Zwick wrote. "Getting rid of it would be a more efficient and durable way to make the rich pay their fair share."

What happens to Prop 40's chances?

The billionaire tax faces resistance on several fronts. Supporters point to the AI boom and argue California's ultra-rich would remain among the world's wealthiest even after paying. Opponents warn the tax would hit economic growth and startups, force founders to sell large stakes in their companies, and eventually push the wealthy out of state — producing a net revenue loss over time.

Repealing Prop 13 carries its own political risk. Many California homeowners would face large property tax increases and would likely resist. The state's tax base is already narrow, and Prop 40 would make it even more top-heavy. California plans to spend $540 billion this fiscal year.

"It is simply not possible to fund the state's needs by leaning on a few hundred people, as politically appealing as that may be," Zidar and Zwick argued. "For California to tax wealth in a progressive fashion and meaningfully improve its fiscal position, it needs to broaden the aperture beyond billionaires to the hundreds of thousands of other very wealthy people who could easily afford to contribute more by paying a real estate tax that finally works."

The Prop 40 vote will test whether California's voters prefer a narrow tax on billionaires or a broader base that touches every homeowner in the state.