By Andrew Wilford, National Taxpayers Union Foundation

California early voting has begun, and the first ballots have begun to trickle in. Tax policy nerds, investors, and angry Frenchmen alike will be watching with particular interest to see what the fate of California’s Proposition 40—a proposed first-of-its-kind wealth tax—will be.

I’ve mentioned before that California’s proposed wealth tax faces legal troubles. I’ve even run through some of them myself. But, as interesting as it surely is to read my J.D.-less opinions on legal matters, we have actual lawyers here at NTUF as well.

One of them, NTUF’s Executive Vice President Joe Bishop-Henchman, recently published a far more exhaustive rundown of the exact legal vulnerabilities Prop 40 faces. For instance:

Retroactivity and Due Process

Though we won’t know Prop 40’s electoral fate until November 3, it will apply to residents of California as of January 1 of this year. Retroactive tax changes have survived legal scrutiny in some limited circumstances in the past, but courts frown much more heavily on retroactive enforcement of a “wholly new tax.” The California wealth tax would be “wholly new” not just to the state, but to the country, making this a fairly cut-and-dry case of unconstitutional retroactivity.

Commerce Clause

Courts use what is known as the Complete Auto test to determine whether a tax complies with the Commerce Clause. Under Complete Auto, a tax must fulfill four conditions. The California wealth tax arguably fulfills none of them.

• The tax must be applied to an activity with a substantial nexus with the taxing state: The tax applies to the entire net worth, including assets outside California or even the country, of billionaires who may not even be California residents anymore.
• The tax must be fairly apportioned: Prop 40 would include no apportionment; 100% of an applicable taxpayer’s assets would be apportioned to California.
• The tax must not discriminate against interstate commerce: Numerous provisions in Prop 40, such as exemptions for in-state real estate assets, target out-of-state assets for special taxation.
• The tax must be fairly related to the services provided by the state: While taxes need not result in dollar-for-dollar services for the taxpayer, the fact that the tax targets 200 individuals to fund health care for the entire state is far out of proportion with the benefit principle of taxation.

Excessive Fines

Under the Eighth Amendment, taxpayers are protected from excessive fines and forfeitures. Not only could this be seen as applying to the confiscatory scale of the tax, it also could apply to provisions targeting exorbitant, crippling penalties at private valuation experts who estimate assets to be worth less than the state tax authorities do.

Right to Travel

Americans enjoy a constitutionally protected right to travel between states. Proposition 40 would apply to individuals even after they leave, causing it to function effectively as a tax on leaving.

There are more legal issues that Joe’s analysis runs down, as well as more detail and case law on the ones I covered above. But the takeaway is easy enough to digest without a law degree: if Prop 40 passes next month, it will get hit with a barrage of lawsuits that read like a Con Law 101 textbook.

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Andrew Wilford is Director of State Policy at National Taxpayers Union Foundation.

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