Proposition 42

Background

Both the state and local governments tax the ownership of certain personal property. These taxes are based on the property’s value. Personal property is all the things that people own other than real estate. One example of these kinds of taxes is the vehicle license fee that car and truck owners pay to the Department of Motor Vehicles each year. Another example is the property taxes owners of business equipment pay to the county each year.

The ownership of many types of personal property is not taxed. One major example is financial assets like stocks and investment accounts. Although the state does tax income people make from their financial assets, there is no tax for simply owning those assets.

Proposal

Prohibits New Taxes on Financial Assets or Other Personal Property. Under Proposition 42, new taxes on the ownership of financial assets or other personal property would not be allowed.

Limits Retroactive Taxes. Proposition 42 limits the situations that a ballot measure or the Legislature can raise any tax retroactively. A retroactive tax is one that applies to things that happened in the past. An example is a tax on money someone earned two years ago.

If Proposition 42 receives more “yes” votes than Proposition 40 on this same ballot, then Proposition 40 could be stopped from becoming law even if it gets yes votes from a majority of voters. This is because the courts could find that Proposition 42 conflicts with Proposition 40.

Fiscal Effects

Proposition 42 restricts the options the state has to raise taxes in the future. This could make it somewhat harder for the state to raise taxes. This could reduce future tax revenues. When and by how much future revenues would be reduced is unclear.

Source: LAO Analysis of Proposition 42