California’s Proposed “Billionaire Tax” Could Become the Country’s First Tax on Wealth

California voters will head to the polls this November to determine the fate of Proposition 40, a measure that would impose a tax on the wealth of the state’s highest-net-worth residents. If approved, it would become the nation’s first tax levied on wealth rather than income.

Under Proposition 40, certain billionaires living in California as of January 1, 2026, would pay a one-time state tax equal to 5% of their net worth. The tax would be due in 2027 (though payments could be spread over five years at an additional cost), and it would generally exclude certain real estate, pensions, and retirement accounts. Other assets, such as artwork, business interest, and stocks, would generally count toward taxable net worth.

What It Would Fund and Whom It Would Impact

The measure would direct revenue into a dedicated account outside the state’s general budget rules. 90% of the proceeds would fund public health care services, with the remainder set aside for education, food assistance, and administration of the tax. The nonpartisan Legislative Analyst’s Office estimates the state would likely collect tens of billions of dollars from the tax. However, the ongoing loss of income tax revenue from billionaires who have already left or plan on leaving the state could offset some of that gain by hundreds of millions of dollars or more each year.

The tax would apply narrowly. California is home to roughly 200 billionaires, some of whom built their wealth as executives or investors in the state’s technology sector, so the measure may not directly affect the vast majority of residents, even those with considerable wealth who fall below the billion-dollar threshold.

Who Is Considered a “Resident”

California defines a “resident” as anyone in the state for other than a temporary or transitory purpose, or anyone domiciled in the state who is outside for a temporary or transitory purpose. Departing residents who leave after January 1, 2026, remain subject to the billionaire tax unless they can prove they were not California residents on that specific date. The state employs a “closest connections” test, looking at factors such as:

• Location of residential property
• Where the taxpayer’s family resides
• Where the taxpayer is registered to vote

What Is Included and Excluded from the Net Worth Calculation

The valuation will be conducted as of December 31, 2026. Assets generally included and excluded are as follows:

Included

• Publicly traded securities at their market value on December 31, 2026
• Private business interests
• Assets under a sole proprietorship
• Grantor trusts
• Roth IRA or substantially similar Roth-type accounts valued above $10 million
• Art, collectibles, intellectual property, vehicles, other financial instruments not publicly traded, and debts or liabilities owed to the individual ($5 million exclusion of total combined asset value from net worth)
• Dependent assets valued over $50,000
• Property valued at more than $1 million transferred after October 15, 2025, for less than fair market value

Excluded

• Directly held real estate
• Qualified pensions
• Tangible personal property located outside of CA for at least 270 days in 2026
• Recourse debts
• Other debt secured by collateral included in the net worth
• Up to $10 million in Roth IRA or substantially similar Roth-type accounts, Roth 401(k) accounts
• Up to $5 million in total value of assets such as art, jewelry, collectibles, and IP

For private business interests, the Act creates a presumption that the value equals the entity’s book value plus a multiplier of 7.5 times the average book profits over the preceding 3 years. As for the 270-day tangible property rule: the 270 days expired on April 5, 2026.

Penalties for understatement of values range from 20% to 40% of the understatement, while appraisers may face a penalty of 2 to 4 percent of the resulting tax, depending on whether there was substantial or gross understatement.

Tax Calculation

The tax is imposed as an excise tax “on the activity of sustaining excessive accumulations of wealth. For an individual with a net worth of $1.1 billion, the resulting tax liability would be $55 million. By contrast, an individual with a taxable net worth of $1.02 billion would face a tax liability of $1.02 million. The act provides a tax rate decrease of 0.1% for every $2 million that the taxpayer’s net worth drops below $1.1 billion, as follows:

The tax would be payable in 2027, although taxpayers could elect to satisfy the liability over a five-year period, subject to a 7.5% annual “deferral charge” on the outstanding balance.

Tax Strategies, Planning, and Mitigation

With the November vote quickly approaching, taxpayers subject to the tax may be evaluating several strategies to mitigate the potential impact of the Billionaire Tax Act. One strategy taxpayers may consider is to migrate to more tax-favorable states such as Florida, Nevada, or Texas.

Another possible way to mitigate the tax is for taxpayers to donate to charity and use the donation to reduce their net worth subject to Prop 40 taxation. For example, a taxpayer with a net worth of $1.1 billion could potentially donate $100 million of securities to charity. By doing so, the taxpayer would reduce their net worth to $1 billion, effectively saving approximately $55 million in Prop 40 taxes. On the other hand, the taxpayer would also receive a charitable deduction (subject to AGI and 35% charitable limitations for high-income earners) that could further reduce income tax. Together, these could potentially generate a total of $90 million in federal tax savings. The Proposition states that “charitable pledges made after October 15, 2025” will not lower an individual’s net worth. The Act also states that property transferred after October 15 for less than fair market value exceeding $1 million will be added back to net worth.

Depending on individual circumstances, other potential approaches may include purchasing vacation homes, transferring assets from LLCs to an individual’s name or revocable living trust, or acquiring other high-value tangible assets outside of California, which could reduce the net worth subject to the billionaire tax, provided these transactions occurred before April 5, 2026. Taxpayers should consult with their tax professional and attorney regarding the applicability and tax implications of any such strategies.

Compliance and Record Keeping

To defend against possible aggressive residency audits or valuation disputes, taxpayers should consider maintaining meticulous records. These could include:

• Residency documentation: evidence of physical presence (travel logs, cell phone records)
• Formal ties to the new state: voter registration, driver’s licenses, homeowner exemptions
• Certified appraisals: Retain proper records of appraiser’s information and certified appraisal reports.
• Liabilities: only genuine debts (such as recourse and those secured by collateral included in the net worth)

California’s Proposition 40 could potentially create a large tax liability for some residents. Depending on individual circumstances, certain planning considerations may affect how the proposed tax would apply. Any such planning should be evaluated with qualified tax and legal professionals.