PROP 42: The Retirement and Personal Savings Protection Act of 2026
Proposition 42 would add a new article to the California Constitution with two main provisions:
- First, it would prohibit any new taxes on personal property—both tangible (i.e., personal belongings) and intangible (savings, retirement accounts, financial assets, business ownership, intellectual property, etc.)—while leaving existing property taxes untouched. In effect, this would require that the California legislature get voters’ approval before creating any new property taxes.
- Second, it would prohibit new taxes that impose liability for past residency or conduct, with a narrow exception allowing taxes to reach back up to 365 days if tied to a governor-declared emergency and dedicated to addressing it.
Notably, if Prop 42 gets more votes than Proposition 40, it would nullify Prop 40 entirely. Given the two propositions fundamentally conflict, this kind of specificity is valuable to clearly determine what happens after the election. This is arguably the most relevant element of Prop 42, because Prop 40 could possibly allow future legislators to pass new taxes on personal property.
Fellows at the Hoover Institution have extensively researched Prop 40, Prop 42, and California’s fiscal problems more generally. The biggest fiscal challenge the state faces is an exuberance of spending beyond what even its rapidly increasing tax revenue can sustain.
Quick Facts
- Official ballot title: “Prohibits New State Personal Property Taxes and Certain Retroactive State Taxes. Initiative Constitutional Amendment.”
- Measure’s own name: The Retirement and Personal Savings Protection Act of 2026 (AG No. 25-0041A1)
- Type: Initiated constitutional amendment and statute
- A vote YES means: A prohibition on new state taxes on personal property, including financial assets. Retroactive taxes would be prohibited except during a state of emergency. If Proposition 42 outpolls Proposition 40, it would specifically void Prop 40 (see California Decides Proposition Lab, Prop 40: The Billionaire Tax Act).
- A vote NO means: The legislature would not be forbidden from passing new taxes on personal property, including financial assets. The legislature would not be forbidden from passing retroactive taxes. The lack of these restrictions is especially relevant if Proposition 40 passes, because Prop 40 arguably empowers future legislatures to pass new taxes on personal property and to create retroactive taxes.
- Full legal text: Initiative 25-0041A1, Office of the Attorney General (PDF)
- LAO analysis: Ballot analysis of Initiative 25-0041 (PDF)
1. Overview
Proposition 40 imposes a one-time tax of 5 percent on the total net worth of any California resident worth $1 billion or more. The rate applies to the whole fortune, not just the amount above the threshold. A narrow phase-in ramps the rate between 0 percent at $1.0 billion and 5 percent at $1.1 billion. A married couple is treated as a single taxpayer.
Residency is set as of January 1, 2026, called the tax obligation date, and net worth is measured on December 31, 2026, called the valuation date. The January date is already in the past. A billionaire who leaves California before the election would still owe the tax if voters approve it because the law reaches back to who lived here on the first day of the year. The tax is due in 2027 with 2026 tax returns, payable in full or in five annual installments that carry a 7.5 percent additional charge each year.
Not all assets are included in the net worth calculation. Directly held real estate is excluded, which sidesteps a fight with Proposition 13 restrictions. Pensions and traditional retirement accounts are excluded, Roth accounts are excluded up to $10 million, and up to $5 million of art, cars, and personal property is excluded.
The revenue from this tax is not allowed to go into the general fund. The constitutional amendment routes it into a separate reserve fund that sits outside the Gann appropriations limit, the Proposition 98 school-funding guarantee, and the rainy-day budget rules. The revenue is earmarked: 90 percent goes to healthcare and 10 percent to education and food assistance, with annual spending caps of $22.5 billion and $2.5 billion. This provision reaches every taxpayer in the state: All 19 million-plus California income tax filers would have to declare whether their net worth exceeds $1 billion.
2. The legal language
- Full text:
Initiative 25-0041A1, Office of the Attorney General (PDF) (six pages, amended language filed January 12, 2026) - Key language:
“No state law and no provision of this Constitution enacted on or after January 1, 2026 may enact, create, impose, or authorize collection of a tax on the ownership or control of retirement holdings, individually-owned assets, and other forms of personal savings, whether held directly or indirectly.” - What it amends:
Adds a new Article VIII to the California Constitution. Because it is a constitutional amendment, the legislature cannot repeal it, and only another vote of the people can undo it. The measure borrows the definition of “tax” from Article XIII A, Section 3, the Proposition 13 and Proposition 26 definition. It also includes a conflicting-measures clause that reaches other initiatives on the same ballot.
3. What, Where, When, Why?
- What?
A constitutional ban on new taxes on the ownership or control of personal property, from personal belongings and savings (including retirement accounts) to business interests and intellectual property. It would also prohibit most new retroactive state taxes, including taxes keyed to a past residency date. - Where?
Statewide, written into the state constitution. - When?
It would apply to taxes enacted or taking effect on or after January 1, 2026. - Why?
The proponents say California already ranks among the most heavily taxed states, that families struggle to save, and that politicians should not be able to tax the value of savings and assets people have already earned.
4. Analysis and Assessment
Proposition 42 would prohibit the legislature from enacting future taxes on personal property, broadly defined. This would be a negligible change to the status quo because the state does not currently levy taxes on tangible or intangible personal property. However, it would forestall future legislatures from taxing personal property without first getting approval from voters via ballot initiative.
The California Constitution currently permits the legislature, with a two-thirds vote, to levy taxes on all tangible and intangible personal property. The first sentence of Article XIII, Section 2, reads:
The Legislature may provide for property taxation of all forms of tangible personal property, shares of capital stock, evidences of indebtedness, and any legal or equitable interest therein not exempt under any other provision of this article.
This language reflects dormant tax policy going back to the 1879 California Constitution. In the 1930s, after years of controversy and litigation over taxes on intangible assets and a sharp decrease in property tax revenues caused by delinquencies during the Great Depression, the state pivoted to implement a sales tax and a personal income tax to stabilize state tax revenue. As part of the tax policy coordination, a 1933 constitutional amendment retained the language allowing the state to tax personal property but limited taxes on many financial assets to be at most 0.4 percent of the value of the asset. Today, California’s Revenue and Taxation Code exempts all intangible assets from taxation. However, the income from intangible assets like stocks and debt instruments is taxed as ordinary income.
One argument against limiting what the legislature can tax is that the state’s tax base is already narrowly dependent on personal income taxes (see California Decides FAQ: Who Pays for California’s State Budget, and What Is It Spent On?). The personal income tax has grown to provide nearly 70 percent of General Fund tax revenue, compared to 38 percent for total state tax collections nationally. Research by Hoover Institution fellows Lanhee J. Chen, Lee Ohanian, and Joshua D. Rauh have described how this causes substantial volatility in the California state budget because most personal income tax revenue comes from high-income and high-net-worth households and tends to fluctuate with stock market performance. For example:
- During the strong stock market returns in 2021 the top 10 percent of taxpayers paid almost 90 percent of personal income tax revenue.
- The top 1 percent of income tax filers typically pay 40–50 percent of personal income tax revenue.
- The top 0.1 percent—just twenty-five thousand households—typically pay more than 20 percent of all personal income tax revenue.
The problem with adding new state personal property taxes, especially on intangible financial assets, is that the impact will tend to be borne by the high-income and high-net-worth households. This means that creating new property taxes wouldn’t expand the tax base—it would simply be tapping the same source of revenue that California already utilizes more than almost any other state.
Dr. Rauh’s California-specific research examining taxpayers’ response to Proposition 30 (2012) shows that high-income and high-net-worth households exhibit the highest migration response to increased taxes, meaning that new state property taxes would potentially undermine the already-precarious tax base. The departure of a significant portion of the tax base for Proposition 40’s wealth tax, even before the tax is even in effect, provides further evidence of the sensitivity of high-income and high-net-worth taxpayers to increased tax rates.
On the other hand, Proposition 42 would provide a credible commitment that the state would not create new property taxes, perhaps providing some degree of reassurance for the households most susceptible to migration, such that more will remain in the state than otherwise. That wouldn’t necessarily expand the tax base, but it would at least help prevent further erosion. Prop 42’s prohibition on retroactive taxes would likely have a similar effect.
A more relevant solution to California’s financial woes would be budget reductions to counter the recent spending explosion, as well as better management of its existing revenue streams to weather the lean times. Research by Dr. Ohanian highlights that from 2019 to 2023 California’s population declined by almost five hundred thousand people (a 1 percent decrease), but the state budget increased by more than 57 percent (31 percent after adjusting for inflation).
State personal income tax revenues surged by 55 percent in 2021 due to a soaring stock market and federal support during COVID-19, but this was followed by a 35 percent drop in 2023. The bust should have been expected given California’s previous experience, but Governor Newsom’s administration assumed that the increased revenue would be permanent and increased government spending commensurately, leading to a $175 billion swing from budget surplus to deficit just two years later.
The boom-bust nature of California’s tax revenue shows the need for better methods to smooth revenues and spending over time. In particular, this will require restraining state policymakers, who have shown a proclivity for pursuing large projects and program expansions during the boom times, only to discover during the bust that discretion is the better part of spending. A comprehensive solution would require extensive tax structure reforms, but in the meantime state policymakers could reduce volatility by revisiting California’s “rainy day fund” to ensure it is fit for purpose.
5. Conclusion
Proposition 42 doesn’t change any current taxes. It effectively only adds the requirement that voters be consulted before the state creates any new property taxes. It also prohibits retroactive taxes and taxes keyed to a past residency date. This provides high-income and high-net-worth households a credible signal that California will not—without reasonable warning—tax the ownership of personal property, especially financial assets. This could help slow the out-migration that erodes the state’s narrow, top-heavy tax base.
Prop 42 also contains a clause that if it outpolls Proposition 40, it will fully nullify Prop 40. This specificity is likely preferrable to having the courts attempt to determine which elements of Prop 40 (if any) still hold if Prop 42 has greater support.
Hoover Institution research shows that California’s spending has risen far faster than inflation or population growth, and even faster than the surprising increases in tax revenue. This suggests that first California should solve its expenditures problem before trying to backfill tax revenue by tapping those households already responsible for the vast majority of income tax revenue.
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