California’s Proposed Wealth Tax: A Bold Move with Far-reaching Implications

California is considering a groundbreaking wealth tax that has the state’s billionaire community in an uproar. The “2026 Billionaire Tax Act,” designed as a ballot initiative, would impose a one-time 5% excise tax on the net worth of California’s billionaires. If it garners enough signatures, the proposal could appear on the November ballot, leaving California’s unpredictable voters to decide its fate. The same voters who have previously approved tax-the-rich measures also passed Proposition 13 in 1978, which strictly limited the state’s real estate taxes. Already facing opposition from the business community and Governor Gavin Newsom, critics warn the tax could trigger an exodus of tech entrepreneurs, potentially leading to a decline in long-term income tax revenues—a concern the tax’s architects dismiss as overblown.

This meticulously crafted proposal aims to raise approximately $100 billion from more than 200 California billionaires, with the revenue flowing into state coffers between 2027 and 2031. The funds would be directed to a dedicated fund, primarily intended to offset federal Medicaid cuts. The tax would apply to a broad base of assets including private businesses, public stocks, personal assets exceeding $5 million, and retirement accounts over $10 million. Notably, real estate held directly or through revocable trusts would be exempt—a provision included partly to avoid conflict with Proposition 13’s limits on real estate taxation. However, real estate held in partnerships or as part of a business’s value could still be subject to the tax. According to the initiative’s detailed description, wealthy individuals could elect to pay the one-time levy over five years with interest, while those with primarily non-publicly traded, illiquid assets could defer taxes until their stakes are sold or cash is withdrawn.

The initiative, sponsored by the Service Employees International Union–United Healthcare Workers West, includes provisions specifically designed to prevent billionaires from relocating to avoid the tax or from manipulating asset valuations. While the tax would be based on net worth as of December 31, 2026, tax residency would be determined as of January 1, 2026—a key date that has already prompted action from some billionaires. Most notably, Larry Page, Google co-founder and Alphabet’s largest individual shareholder, spent $173.5 million on Miami properties in December as his associated companies moved out of California just before the deadline. However, establishing non-residency in California is notoriously difficult, especially for those with deep ties to the state. California’s tax agency has aggressively—and often successfully—challenged hasty relocations and non-residency claims, applying an expansive test that considers all evidence of a taxpayer’s intent to permanently leave the state, including physical presence, property ownership, and personal and professional connections.

The proposal faces significant legal and practical hurdles before it could become law. First, it needs certification by the state and must gather 875,000 valid voter signatures by late June to qualify for the November ballot. If passed, the measure would undoubtedly face intensive legal challenges from its targets on multiple constitutional grounds. The drafters have attempted to preempt some of these challenges, noting that while the U.S. Constitution prohibits federal wealth taxes, states have long-standing power to tax residents’ wealth and property. The initiative also explicitly amends the state constitution to head off challenges on state constitutional grounds. Beyond legal issues, enforcement would present major challenges, which is why the proposal includes numerous provisions to prevent asset undervaluation. Private businesses would be valued at their book value plus 7.5 times their annual profits (but not less than their last funding round valuation), personal assets like art would be valued at no less than their insured value, and directly held real estate acquired in 2026 would not be exempt if purchased to evade the tax.

California’s nonpartisan Legislative Analyst Office has cautioned that the measure would likely cost the state hundreds of millions or more in personal income tax revenue annually—potentially an understatement if billionaires relocate their businesses, resulting in lost employee income taxes and corporate tax revenues. California already imposes the nation’s highest state individual income tax rate at 13.3%, including a 1% surcharge on income over $1 million that voters approved in 2004. According to LAO analysis, the state currently derives half its personal income tax revenue from the wealthiest 2% of its population. However, the tax’s academic architects estimate that billionaires account for only about 2.5% of California’s personal income tax revenues, as the super-wealthy have more opportunities to avoid recognizing taxable income—they can, for example, borrow against their stock rather than selling it and triggering capital gains taxes.

Critics worry that even if the tax doesn’t pass, its mere proposal sends a troubling message that could jeopardize the San Francisco Bay area’s recent AI-driven economic revival. Tax experts point out that startup founders who become paper billionaires by the end of 2026 could face taxes on phantom wealth if their companies’ valuations later crash before they can cash out. Even if company values hold, founders would need to sell shares to pay the wealth tax, then pay combined federal and California capital gains taxes of 37.1% on those proceeds—requiring them to sell even more shares and further dilute their ownership stakes. California isn’t alone in targeting the ultra-wealthy; New York City’s combined state and city income tax rate is already the nation’s highest, and newly inaugurated Mayor Zohran Mamdani ran on a platform to raise it further—winning despite significant opposition funding from billionaires, a fact that may worry those preparing to fight California’s proposed wealth tax.