Last week, the Democrats resoundingly won control of Congress in part by tapping into populist anger at an economy rigged for billionaires. And in Washington and Colorado, voters approved tax hikes on the rich. In California, though, the billionaires managed to defeat a proposed wealth tax—and did so not simply by tapping their deep pockets, but by exploiting an unfair tax break that is effectively subsidized by American taxpayers like you.
Proposition 40 would have enacted a one-time 5 percent tax on the California’s roughly 200 billionaires, mainly to backfill the federal funding cuts to Medicaid in President Trump’s One Big Beautiful Bill. But the billionaires weren’t feeling charitable—at least, not in the typical sense. Building a Better California, the nonprofit organization created to oppose the tax, raised more than $333 million, much of it from Big Tech billionaires: Google co-founder Sergey Brin gave $102 million and Google’s former CEO Eric Schmidt gave $40 million.
Whatever you think of Prop 40 in particular or wealth taxes in general, there’s a wrinkle that should make every working taxpayer furious: The billionaires who spent unfathomable sums of money to keep their taxes from going up actually got a tax break for doing so. As The New York Times reported, Building a Better California’s fundraisers encouraged donors to give appreciated stock instead of cash because, thanks to a loophole in federal law, gifts of appreciated stock are not subject to capital gains tax. That made for an appealing fundraising pitch to billionaires: Donate your shares, and you will never have to pay capital gains tax on the increase in their value. It worked. More than two-thirds of what the group raised over the campaign’s final six weeks came in as stock.
So how does this loophole work? Billionaires do not make their money the same way that working people do. Their income mostly doesn’t come from a paycheck or even a bonus at the end of the year; they make their money from owning things and having those things increase in value. If they sell those things, they owe capital gains tax—i.e., tax on the amount that the asset’s value increased since it was purchased. But if they donate their ownership stakes to a charity, they owe nothing on the gain, and of course the charity doesn’t pay taxes on the donation, either. That may be defensible if the donation is to a food bank. It’s much less defensible for political donations.
In fact, Congress already addressed exactly that. Section 84 of the tax code says that if you give appreciated property (including stock) to a political organization, you are treated as if you sold it, and you pay tax on the gain. That makes sense—but there’s a catch. Section 84 borrows the definition of “political organization” from another part of the code that covers only groups working to elect candidates. So billionaires like Building a Better California’s donors who give to an organization fighting a ballot measure aren’t covered.
The stakes are not small. If a billionaire gives cash to an advocacy group or a ballot initiative, they will have paid taxes on the income that created that cash. But if they give stock or an asset, they won’t. That means the public is essentially subsidizing their advocacy giving. For example, for a founder whose shares cost him or her next to nothing to acquire, every $100 million donated in stock rather than cash can mean as much as $37 million in avoided federal and state capital gains tax. That is a significant public subsidy, paid by everyone else, for the most powerful people in the country to outspend the voters.
This loophole is particularly concerning because the whole point of establishing ballot referenda as a pathway for policymaking was to enable ordinary people to go around legislatures that don’t act in the people’s interest. Indeed, as the Ninth Circuit Court of Appeals has explained, California originally adopted the initiative system in 1911 under the leadership of a Progressive Reform Movement governor as an antidote to capture of the legislature by the Southern Pacific Railroad—that it is, “at its core, a mechanism to ensure that the people, rather than corporations or special interests, maintain control of their government.” And across the country, voters have used initiatives to raise the minimum wage, enact paid leave, expand Medicaid, protect reproductive rights, and more, often over the objections of the politicians and the donors who fund them. That is precisely why the ultra-wealthy target these initiatives.
The good news is that the fix is simple. Congress could amend Section 84 to provide that “political organization” means any group organized and operated primarily to accept contributions or make expenditures for the purpose of (1) advocating for or against any candidate for public office, (2) advocating for or against the qualification for the ballot, or the passage of any ballot measure in any election, or (3) federal lobbying activities.
That’s it. Donating appreciated stock to fight a ballot measure would be treated exactly like donating it to fight a candidate: as a sale, with tax owed on the gain. Donors would still be free to spend whatever the law allows. They just wouldn’t get a tax break for doing it.
Granted, passing this fix is not quite as simple. With control of Congress next year, the Democrats could pass this tax-reform measure with a simple majority vote, since tax measures are eligible for the reconciliation process. Trump could veto it. But even if the Democrats have to wait two years to get such a bill over the line, now is the time to start laying the groundwork for it.
Our tax code is in need of many other reforms, of course. There are simply too many ways for billionaires to legally avoid paying their fair share. But it will be immensely more difficult to reform our tax policy if billionaires get tax breaks for fighting to keep their tax breaks.
