Prop 42 Seeks to Limit State Tax Authority on Retirement Accounts

Since 2019, lawmakers in Sacramento have introduced five separate proposals to tax retirement and personal savings. None passed, but the authority for the Legislature to impose such taxes remains in the state Constitution. Proposition 42, appearing on the November ballot, would close that gap by barring new state taxes on retirement accounts, pensions, 401(k)s, IRAs, savings, and other personal property.

The measure also includes a provision against retroactive taxation. This rule would prevent the state from changing tax rules after individuals have already saved money. Supporters argue this stability is essential for those who built their savings without employer-matched plans or corporate pensions.

Julian Cañete, president and CEO of the California Hispanic Chambers of Commerce, stated that many Latino business owners save for retirement from their own pockets after covering payroll and rent. He noted that these owners often use their savings to support their children or pass their businesses to the next generation. Cañete said the state ranks as the third most expensive for retirees, making it difficult for owners to stop working when they wish.

The amendment does not cut funding for schools, public safety, or health care. It also does not affect income or property taxes. The proposal is backed by the California Small Business Association and the California Multicultural Business Alliance. Other groups supporting the measure include firefighters, peace officers, construction workers, veterans, and seniors.

Under current law, the Legislature has the authority to tax these forms of personal property. The measure aims to lock in the current tax treatment, ensuring that the state cannot raise taxes on these accounts in the future. For small business owners who have saved over decades, the proposal offers a constitutional shield against future legislative changes.