Prop 40 Failed and Prop 42 Passed: What You Should Know

California's November 3, 2026 ballot carried two tax measures that were written to collide. Proposition 40 would have imposed a one-time 5% tax on the assets of California billionaires. Proposition 42 was placed on the ballot to block that kind of tax. Voters rejected the first and approved the second. For most business owners, the immediate effect is that very little changes on next year's return. The longer-term effect is a new constitutional limit on what kinds of state taxes California can adopt in the future.

What Happened to Proposition 40

Proposition 40 sought a one-time 5% tax on billionaires' assets to help offset federal healthcare funding cuts. According to the Los Angeles Times, the measure trailed from the first day of counting and was officially rejected on the night of November 9, with roughly 53% voting no and 47% voting yes, as reported by the Associated Press. The measure drew support in Los Angeles and San Francisco but lost statewide.

Because Proposition 40 failed, the asset tax it described will not take effect. No billionaire asset tax return, valuation, or payment will be required.

What Proposition 42 Does

The Legislative Analyst's Office describes Proposition 42 as prohibiting new state taxes on the ownership of financial assets or other personal property, and limiting the situations in which the state can raise any tax retroactively. The Secretary of State's Quick Guide summarizes it the same way: no new state tax on the ownership of personal property (everything people own other than real estate), and no new state tax that applies retroactively based on a taxpayer's past activities.

A few details from the measure's text matter for business owners:

• It is forward-looking. The ban applies to state laws and constitutional provisions enacted on or after January 1, 2026. Taxes that were in effect, imposed, and first collected on or before December 31, 2025 are not affected.
• Real estate is carved out. The measure states that it does not alter or affect the taxation of real property.
• Business interests are covered. The protected category is broad and, as CalMatters reports, includes business holdings, intellectual property, and financial assets.
• Retroactive taxes are restricted. A new state tax generally cannot reach back to conduct, activities, or residency status before its effective date. The Legislature keeps a narrow exception of up to 365 days when the Governor has declared an emergency or a fiscal emergency and the revenue is limited to responding to it.

CalMatters reported that Proposition 42 passed, and unofficial returns posted on November 10 showed it ahead with about 51.5% of the vote. Counties are still completing their canvass, so treat the final percentages as preliminary until the results are certified.

What Does Not Change for Your Business

Neither measure changes the taxes California business owners pay today:

• California income tax. Rates still run from 1% to 12.3%, with an additional 1% on taxable income over $1 million, for a top rate of 13.3%, as the Franchise Tax Board describes. Proposition 42 bars taxes on owning assets, not on the income those assets produce. The LAO notes that the state taxes income from financial assets but has no tax on simply owning them.
• Property tax. Real property tax is unchanged, and existing county property tax on business equipment, which the LAO cites as an example of a current personal property tax, continues because it predates 2026.
• The pass-through entity elective tax (PTET). Partnerships and S corporations can still elect to pay the 9.3% entity-level tax for taxable years beginning before January 1, 2031, under the FTB's PTET rules. See our companion piece on the 2026 SALT cap and PTET.
• Gain on selling your business. A sale of your company or your interest in it is still taxed as income in California, at ordinary rates, as it was before the election.

What It Means for Planning

Relocation decisions. Some owners considered leaving California because of Proposition 40. With that measure defeated and Proposition 42 restricting retroactive and residency-based taxes, a move driven only by fear of an asset tax deserves a fresh look. Residency planning still matters for income tax on a future sale, and it should be modeled on the actual rules.

Valuation and entity structure. Since no asset tax is coming, there is no reason to restructure ownership or obtain valuations solely to prepare for one. Valuations for gifting, buy-sell agreements, or estate planning remain useful on their own merits.

Future tax proposals. Proposition 42 limits new state taxes on owning assets, but it leaves other revenue options open, and CalMatters notes that voters could change it with a later ballot measure. Owners should keep watching proposals that target income, sales, or business activity rather than ownership.

For the rest of your 2026 planning, start with our 2026 year-end tax planning checklist for California small business owners.

Key Takeaways

• Proposition 40, the one-time 5% billionaire asset tax, was rejected and will not take effect.
• Proposition 42 bars new state taxes on owning financial assets and other personal property, including business interests, and restricts retroactive state taxes.
• Existing taxes, including California income tax, real property tax, county tax on business equipment, and the 9.3% PTET, are unchanged.
• The measure applies to state laws enacted on or after January 1, 2026, and does not affect taxes first collected on or before December 31, 2025.

If you want to understand how the election results affect your business, residency, or exit plans, schedule a consultation with SMB CPA Group. You can also contact us, learn about our custom scope of work, or review our pricing.

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