California’s Billionaire Tax Is Not a One-Time Tax

The 2026 Billionaire Tax Act is a California ballot initiative sponsored by the Service Employees International Union-United Healthcare Workers West that would impose an emergency one-time five percent tax on billionaires to prevent what its supporters describe as the collapse of California's healthcare system. Supporters include Senator Bernie Sanders and Representative Ro Khanna, who argue it is a matter of values and that billionaires should pay a modest wealth tax so working-class Californians can keep their Medicaid.

The pitch is straightforward: a targeted, temporary levy on a tiny number of extraordinarily wealthy people, roughly 200 of them, to shore up the state's healthcare and education budgets in the face of federal funding cuts. It affects only billionaires. It happens only once. It will never touch you.

You have heard this before. Everyone has. And history has a very clear answer to what "one-time" and "only the wealthy" mean in the long run: ongoing, and not only the wealthy.

The Federal Income Tax Was Supposed to Be a Tax on the Rich

Tax Notes reports that back in 1909, when the 16th Amendment was making its way to the states for ratification, the New York Times warned that "When men once get the habit of helping themselves to the property of others, they are not easily cured of it." That was prophetic for all taxes, but especially for the income tax.

When Congress created the federal income tax in 1913, rates ran from one percent, starting on incomes above $3,000, or roughly $90,000 in today's dollars, to a top rate of seven percent on incomes above $500,000, or the equivalent of $16 million today. Between one and three percent of the population paid it. It was explicitly sold as a tax on the wealthy that ordinary Americans would never have to pay. 

Within five years, wartime financing had pushed the top rate to 73 percent. By 1918, the income tax had already displaced tariffs as the dominant source of federal revenue. The rate briefly retreated to 25 percent during the prosperity of the 1920s, but the threshold fell with it: by 1928, the top rate applied to income above $100,000, the equivalent of under $2 million today. 

Then came the Depression and a second war. The rate climbed back to 79 percent under Franklin Roosevelt and, in 1944, reached its historic peak of 94 percent, a rate that would have been unimaginable to the legislators who passed the original one to seven percent levy three decades earlier. But the rate was only half the story. The threshold was also much lower than its original level: the 94 percent rate applied to incomes above $200,000, equivalent to roughly $3.7 million today, less than a quarter of the original 1913 threshold in real terms. The tax wasn't just higher. It also reached dramatically further down the income scale.

And it reached more people. As late as 1939, fewer than four million individual returns were filed. Then in the space of just six years, the number of Americans paying some income tax rose from seven percent of the population in 1940 to 64 percent by 1944. By 1945, 50 million individual income-tax returns were filed, and the filers paid more than $19 billion, almost 20 times the amount Americans had paid just five years earlier. The mechanism that made this expansion nearly frictionless was payroll withholding, introduced in 1943, which shifted the burden of collection from the taxpayer to the employer. 

The top rate then fell from 91 percent to 70 percent with the Kennedy tax cuts of the early 1960s, where it remained throughout the 1970s. Reagan brought it to 50 percent in 1982 and then to 28 percent by 1988, the lowest level since the 1920s, before it settled at its current 37 percent. Today, roughly 60 percent of households pay the federal income tax, and the top rate kicks in well below the millionaire threshold (it applies to single filers with incomes above $626,350 and married filers with incomes above $751,600).The full arc spans 110 years, two world wars, a depression, and more than a dozen acts of Congress. What it illustrates is the nature of the instrument itself. Once created, a tax is never just a number. Rates can be raised or lowered. The threshold can be revised upward or downward. The base can be expanded or contracted. All these moves are available for any emergency (real or imagined), appetite, or ideology that arrives next – and history shows that something always does.

Social Security to Medicare: 2 percent Becomes 15.3 percent

When Congress created Social Security in 1935, it financed the program with a combined payroll tax of two percent on the first $3,000 of wages, first levied in 1937. Even then, the original legislation scheduled the rate to rise to three percent by 1949. What began as a narrow contribution to an economic security program — when Social Security was enacted, poverty rates among senior citizens exceeded 50 percent — has never stopped growing.

First, the mission expanded. The Social Security Administration's own records document the transformation: coverage became nearly universal, Congress added Disability Insurance in 1956, and Medicare for aged and disabled recipients followed in 1965. Yet each new obligation was layered onto the same payroll-tax structure, with little public debate about whether the original instrument was the right vehicle for these new missions. The program did not evolve through a single major overhaul, but grew with each step modest enough to avoid serious scrutiny, the cumulative distance from the original design visible only in retrospect.

Then the rate followed the mission. The combined Social Security rate today is 12.4 percent, more than six times the original, and applies to the first $184,100 of wages now. Medicare, added in 1966 at a combined rate of 0.7 percent, now stands at 2.9 percent with no wage cap, meaning every dollar of earned income is subject to it regardless of how much a worker makes. The Affordable Care Act extended Medicare taxation further, adding surcharges on high earners (above $200,000) and a new tax on investment income, so that a narrow payroll contribution to fund hospital insurance for the elderly has become a multi-layered tax that reaches wages, salaries, and investment returns at every level of the economy.

Social Security's payroll tax did not reach its current scale through a single vote. It gradually increased, step by step, over nine decades, with each Congress finding its own reason to expand the base, extend the mission, or raise the rate. The tax, once established, was simply too politically useful to leave alone.

The Alternative Minimum Tax: 155 People become Millionaires

In 1969, Congress created an add-on minimum tax specifically to make sure that 155 wealthy households (earning above $200,000, which is about $2 million today) who had legally paid no income tax would pay something. It was a tax made for 155 people. But once it was in the books, it started to grow. As the Tax Policy Center explains, “Congress enacted the modern alternative minimum tax (AMT) in 1979 to work alongside the add-on minimum tax. The main preference items, including capital gains, moved from the add-on tax to the AMT. Congress repealed the add-on tax, effective in 1983.” After the changes, the AMT affected fewer than 1 million taxpayers each year. Because the income tax was adjusted for inflation, but the AMT wasn’t, it slowly moved down the income scale over the following decades until, by the mid-2000s, it threatened to catch millions of middle-class households who had never been near Congress's original targets. 

Congress had to pass annual emergency "patches" to prevent a tax designed for the ultra-wealthy from affecting teachers, nurses, and engineers. The 2017 Tax Cuts and Jobs Act dramatically curtailed the AMT's reach, reducing the number of affected taxpayers from more than five million to roughly 200,000. The One Big Beautiful Bill Act of 2025 then made those changes permanent, resolving, at least for now, nearly half a century of bracket creep that its creators never intended and could not have foreseen. 

The AMT remains on the books, and its phaseout thresholds were actually tightened in 2025, meaning it will continue to bite some upper-income filers. But the story of a tax conceived for 155 of the wealthiest Americans metastasizing into a threat to millions of ordinary households stands as one of the clearest examples of what happens when government creates a tax mechanism without indexing it to inflation and then walks away.

California's History

Proponents of California’s billionaire tax insist that this levy will be constitutionally enshrined as a one-time tax, that it applies only to current billionaires, and that it cannot be extended. Perhaps. But California's own tax history offers a sobering counter-narrative.

When California established its income tax in 1935, the top rate of 15 percent applied to income above $250,000, which at the time was the top two percent of income earners, equivalent to nearly six million today. It dropped to six percent in 1943, then resumed its hike in 1959, according to the Institute on Taxation and Economic Policy database. The current 13.3 percent top rate applies to income above one million. The rate is lower. The reach is far broader.

This tax did not expand all at once. The top rate of the base structure reached 9.3 percent for millionaires, where it sat for several years as the standard top bracket. It is the product of two separate, layered taxes, each with its own history. The first layer is the one percent Mental Health Services Tax on income above one million, enacted permanently by voters through Proposition 63 in 2004. The second layer came from Proposition 30 in 2012, which Governor Jerry Brown explicitly sold to voters as a temporary emergency and progressive levy on taxpayers with annual incomes over $250,000 to address a budget crisis. It was scheduled to expire in 2018. When 2018 approached, voters extended it through 2031 via Proposition 55. There is now a ballot measure to make it permanent. A tax initially introduced as a temporary solution to a specific financial crisis is becoming a permanent fixture.

The structural reason this keeps happening is not simply a matter of tax design. It is a spending problem compounded by a political one. The top 10 percent of earners pay 75 percent of California's total income-tax revenue, and the top one percent alone pay nearly 45 percent of it. That concentration does create a volatility problem: when the economy turns, or high earners leave, revenues collapse sharply. But volatility only becomes a crisis when spending has been allowed to expand aggressively during boom years, locking in obligations that cannot easily be cut when revenues fall. California has repeatedly made that choice. The political logic is straightforward. When most voters bear little direct cost from tax increases on a small group, resistance is weak, and the temptation to spend freely is strong.

The result is a self-reinforcing cycle: loose spending requires ever more revenue, which is easiest to extract from the same concentrated group; this deepens structural fragility, which then justifies the next round of increases on that same group when the next crisis arrives. The tax design enables this cycle, but the cycle itself is driven by spending decisions and the political incentives that make those decisions so easy to repeat. Now back to that wealth tax. Assume, for the sake of argument, that the architects of the billionaire tax are entirely sincere. They genuinely believe this tax will be a one-time levy, spent down, and never reinstituted. The problem is that math guarantees this belief will be disproved.

The entire one-time premise rests on the assumption that the tax will raise $100 billion. However, a new analysis by economists Joshua Rauh, Ben Jaros, Gregory Kearney, and John Doran at the Hoover Institution casts doubt on that assumption. A significant share of the tax's intended base has already left California in anticipation of the measure, before it even qualified for the ballot. The realistic revenue estimate is closer to $40 billion under optimistic assumptions, and once the permanent loss of income taxes from departing residents is factored in, the net fiscal impact is likely negative. You read that right: the wealth tax will likely be a net cost to California.

The architects of this tax are counting on $100 billion to fund a specific set of commitments. They will collect from that tax less than half of this sum. The programs they planned to fund will exist. The money to fund them will not. Which means the tax-raisers will be back.

And this is where the one-time promise becomes self-defeating. As Rauh and his co-authors explain, the Billionaire Tax Act is not just a revenue measure; It is a constitutional amendment. Passing it would permanently remove the legal restriction that currently prevents California from taxing intangible property. Today, that barrier exists. The moment this measure passes, it disappears. Future legislatures and future ballot initiatives would operate in a fundamentally different legal environment, one in which wealth taxes are constitutionally permissible in ways they are not today.

So the sequence runs as follows. Proponents promise a one-time tax raising $100 billion. The tax raises far less than projected because the wealthy, as they predictably do, respond by leaving. The spending commitments financed by the expected revenue are now underfunded. The structural deficit that motivated the tax in the first place has been paid. And the constitutional barrier that once prevented a second attempt has been permanently dismantled by the first one.

The one-time tax was always going to need a sequel – and probably several. The only question was whether the legal framework would permit one. The Billionaire Tax Act answers that question by removing the framework entirely.

Conclusion:

Warning of the slippery slope in taxation is not a rhetorical ploy to score political points. It is one of the most empirically reliable phenomena in public finance. The mechanism is straightforward: once a tax exists, it creates a revenue stream that governments depend on, a bureaucracy to administer those funds, and a political coalition to defend them. The original rationale for temporary and targeted use for emergency purposes invariably fades. The tax remains. The rate rises. The base expands. The economy is squeezed.

Californians, consider yourself warned.

Veronique de Rugy is the George Gibbs Chair in Political Economy and Senior Research Fellow at the Mercatus Center at George Mason University. She is also a nationally syndicated columnist and contributing editor to Civitas Outlook.