In Sacramento, Rep. Ro Khanna (D‑Calif.) is promoting a one‑time 5% wealth tax on the state’s billionaires, tied to the upcoming vote on Proposition 40. The proposal, which would assess tax liability on the paper value of privately held shares, has drawn sharp criticism from entrepreneurs who say it could cripple the very businesses that create jobs and fund public services.
How the tax would work
Under Khanna’s plan, a founder whose company is valued at $10 billion but who holds only $2 billion in equity would owe $100 million in tax, even though none of that cash sits in a checking account. The tax would be calculated on the unrealized appreciation of stock, not on cash actually received.
Khanna suggests the founder could sell shares to cover the liability, but many private‑company shares are illiquid and selling could force a founder to relinquish a large portion of the business before it reaches its full potential. As an alternative, Khanna has floated the idea of allowing the founder to borrow against the shares, with the government acting as the lender. The loan would be secured by the founder’s stock, and the state could seize the shares if the loan defaults.
Entrepreneurial concerns
Mark Cuban and other tech leaders argue that the proposal creates a perverse incentive structure. A founder could spend years building a company, hiring engineers, opening factories, and generating payroll taxes, yet still lack the cash to repay a government‑backed loan. If the founder’s shares increase in value over time, the government could profit by selling the collateral, effectively turning the tax into a forced acquisition of private equity.
Critics also note that wealth‑tax advocates often decry wealthy individuals borrowing against appreciated stock to trigger capital‑gains taxes, yet the Khanna plan would encourage the same borrowing, this time from the federal government.
Constitutional and practical hurdles
Legal scholars point out that a wealth tax could run afoul of the Constitution’s Uniformity Clause, which requires taxes to be applied evenly across similar classes of taxpayers. Additionally, the administrative burden of valuing private‑company shares each year would be immense, potentially leading to costly disputes and litigation.
From a fiscal perspective, past attempts at wealth taxes in other jurisdictions have generated minimal revenue while imposing significant compliance costs. The California proposal is no different, according to analysts who warn that the tax could discourage investment and reduce the state’s long‑term tax base.
Political context
The wealth‑tax debate is part of a broader discussion about how to fund California’s budget shortfall. While some lawmakers argue that taxing extreme wealth is a matter of fairness, others contend that encouraging private investment and entrepreneurship is a more sustainable path to economic growth.
Khanna’s proposal arrives as the state prepares to vote on Proposition 40, a measure that would amend the state constitution to allow the wealth tax. Voters will have to weigh the potential short‑term revenue gains against the long‑term impact on job creation and constitutional integrity.
Looking ahead
Whether the wealth‑tax initiative passes will depend on how effectively opponents can communicate the risks to both voters and the business community. For now, the conversation highlights a fundamental tension between the desire for immediate fiscal relief and the need to preserve an environment where entrepreneurs can build companies that fuel the economy and support families across California.
Original reporting: Herald-Standard – latest news for Uniontown, Pennsylvania — read the source article.
