California Billionaire Tax Fails to Pass!

0:00I'm Kent Lindstrom, co-founder of 8Bit Capital, a Silicon Valley venture capital firm that invests and the software startups of the future. We focus on AI, cybersecurity, and fintech. I'm going to take you behind the scenes in Silicon Valley. This is the Something Ventured Podcast.

0:25All right, welcome back. It's the Something Ventured Podcast. I'm Kent Lindstrom. I am your host. I'm also your guest today. A quick and presumably for a while final update on that Prop 40 in California. That's the billionaire's tax, and it has not passed in California. I thought I'd explain a little bit about what's going on because this was such an existential threat to Silicon Valley in the minds of some people. So I'll quickly explain that and explain what happened. Prop 40 was going to be a one-time tax on billionaires. It was a proposition here in California, and a lot of people thought it would end Silicon Valley.

1:00and had different implications for individuals as well. So it didn't pass, which is a little bit surprising. The reason it's surprising is because it's called a billionaire's tax, which you would think in this moment, in this zeitgeist would be popular. But it didn't pass. So there's two possible reasons for that. I'll start with the rational one and then give you the inside politics one, inside California politics. So the one-time 5 % tax on billionaires. The main reason that, again, this is if you're being rational that it might not pass, is that you would stop starting forming companies in California.

1:43And so if you think of a company like Google, while the founders are worth, you know, whatever it is,$300 billion, which does seem crazy, the other$3.5 trillion of wealth they created goes to their employees who are in California, goes to pension funds, goes to your 401k perhaps. And so the concern would be, well, people aren't going to come to California to start these businesses as they once did. So that's the first thing would destroy Silicon Valley. You'd be crazy to come here and start a company. The more particular issue is that it's a tax on the value of your assets. Well, if you run a company, even if it's worth a billion dollars on paper and you're worth$100 million on paper.

2:23You don't have$100 million. You have paper. There's a second nuance that it actually goes to how much you control. So in the case of the Google guys, they control about 60 % of Google shares, but they only own about 6%. And so they'd have to pay tax on the 60%, which is insane. Not only, well, for them, it's liquid, but they don't really own it. So it would, in that sense, perhaps destroy Silicon Valley. the other issue was that in the um not even in the fine print in the print it said by the way if if the california legislature that's a 100 democrat supermajority legislature decides that that's not enough um tax then they can lower the threshold from being a billionaire to anything millionaire whatever you want and the tax can recur so um our legislature in california has never met a tax they didn't like.

3:18So the odds that this would pretty rapidly become a, not a billionaire tax, but a everybody tax were pretty high. And then another nuance too, by the way, the only way that the state can know who's a billionaire is by having everybody list all their assets. You can't just use the Forbes, you know, 100 billionaire list. You would say to California residents, hey, list all your assets, your car, your house, et cetera. You know, how does that make you feel? Your 401k. The possible political reason, the more cynical reason that it didn't pass is this. Prop 40, the billionaire tax, was one union in California, the healthcare union, and the money was to go to healthcare causes that this union's employees work at.

4:07So it is possible that the other unions, and therefore Gavin Newsom, and therefore the new Governor Becerra, were all opposed to it. So a bunch of people were opposed to it, perhaps because it was bad policy, perhaps because they weren't in on the grift. The concern then is that next time there's going to be a whole bunch of different billionaire taxes, maybe one for the teachers, one for the carpenters, one for the government employees, one for the healthcare workers. Well, there was another proposition in California called Prop 42, which I forget what it was called, but it's basically the Don't Tax My Assets Now or Retroactively Act.

4:43And it did two things. It said, number one, it's a constitutional amendment. Number one, you can't tax people's assets. If you've earned your money and you put it in your bank account or your 401k, it's your money. You can't come back and tax that. Separately, it said you can't retroactively tax people, which I think a lot of people just say is kind of unfair, right? Like, oh, I'm going to tax you going back a couple years, and even if you leave, it doesn't matter. It banned those two things, and it passed. So the implication is when somebody comes back and says, well, I want to have a billionaire's tax this time, it's going to go to whatever.

5:22They first have to, or simultaneously, but they also have to repeal the constitutional amendment that says that you can't have a tax like that. So other than that, California, by the way, passed every single tax that was on the ballot as far as I can tell. but for the moment and maybe a fleeting moment, um, Silicon Valley is safe. The billionaire's tax, the asset tax in California did not pass. And there's your update. Uh, thanks for sticking with me on this, uh, little journey on this topic that I know a lot of you said was interesting and confusing and misleading. Well, there you go. All right.

6:00That's brief. That's me. It's been the something about your podcast. I will talk to you next time.