Author: Janet Novack, Forbes
Translation: Lemin, Forbes
Original Title: “California’s ‘Billionaire Tax’ Sparks Controversy, Rich People Vote with Their Feet”
This innovative measure aims to impose higher taxes on the state’s ultra-wealthy—some believe that these billionaires are not bearing tax burdens commensurate with their wealth. The proposal may be put to a vote by California voters in November.
Critics point out that the proposal to impose a one-time 5% tax on California billionaires’ assets could jeopardize the economic recovery driven by the artificial intelligence industry in the San Francisco Bay Area. Image source: STEVE PROEHL/GETTYIMAGES
The California wealth tax proposal has angered many of the state’s billionaires, who have even threatened to relocate their families (some have already begun to do so). However, despite the novelty and thoroughness of the proposal, there is still a long way to go before it becomes law and is enforced. The proposal is advanced through a voter referendum; if enough signatures are collected, it will be voted on by California’s unpredictable electorate in November. Californians have historically been willing to support tax increases on the wealthy, but in 1978, they also approved Proposition 13, which imposed strict limits on property taxes in the state.
Currently, the proposal has met with unanimous opposition from the business community, and California Governor Gavin Newsom has also expressed dissent. Critics warn that this could lead to a large-scale exodus of tech entrepreneurs (and their companies and jobs) from California, which could result in a decline in the state’s income tax revenue over time. However, the drafters of the proposal have dismissed this view.
The “2026 Billionaire Tax Act” proposes a one-time 5% “consumption tax” on the assets of California billionaires. Four scholars involved in drafting the proposal stated that the law would impose approximately $100 billion in taxes on over 200 billionaires in California (these estimates are based on Forbes’ billionaire net worth valuations).
The funds would be gradually allocated to California’s treasury between 2027 and 2031, creating a special fund primarily to fill the federal Medicaid program’s funding gap. The scope of this tax is broad, covering unlisted company equity, publicly traded stocks, personal assets valued over $5 million, and retirement accounts exceeding $10 million. The only major exemption is real estate held directly through revocable trusts—this provision is partly designed to avoid conflicts with Proposition 13. Under Proposition 13, the property tax rate is capped at 1% of assessed value, with annual reassessment increases limited to 2%, unless the property changes ownership. However, real estate held through partnerships or included in business assets is still subject to this tax.
In late November last year, the proposal was submitted to the California Attorney General’s Office in a 32-page explanatory document. It states that billionaires can choose to pay this one-time tax in installments over five years, with interest. For those holding illiquid assets such as unlisted startup equity, they can enter into a “selective deferral account” agreement with the state, delaying tax payments until the equity is sold or cash is extracted.
The proposal was initiated by the Service Employees International Union-United Healthcare Workers West (SEIU-UHW), and was first publicly announced in October last year. Its provisions aim to explicitly prevent billionaires from avoiding taxes by relocating or manipulating asset valuations. Although the tax basis is the billionaire’s net worth as of December 31, 2026, the tax residency status is determined as of January 1, 2026.
It appears that some billionaires are attempting to complete their relocation by the end of 2025, most notably Larry Page, co-founder of Google and the largest individual shareholder of Google’s parent company Alphabet. In December last year, Page spent $173.5 million to purchase two properties in Miami, and his affiliated companies also moved out of California at the same time, just before a critical deadline. However, the process of fully severing California tax residency is lengthy, and California tax authorities have historically taken a tough stance on such issues, often successfully rejecting hurried relocations or non-resident tax claims.
In September last year, the California Tax Appeals Office ruled that Canadian comedian Russell Peters owed back taxes from 2012 to 2014 and determined he was a California tax resident during that period. Despite owning homes, apartments, and a driver’s license in Nevada (which has no state income tax), registering three companies there, and filing as a non-resident in California with a Canadian address, the court found that Peters also owned property in California, was living with his ex-wife and their daughter in California, and his credit card statements showed he spent more days in California than anywhere else.
The court cited the 2021 Bracamonte case—where a couple attempted to move to Nevada to avoid taxes on a business worth over $17 million—and ruled against them. That case established a broad standard requiring courts to consider multiple factors, including the taxpayer’s registration in the state, personal and professional ties, actual residence time, and property holdings, to determine tax residency.
“Determining California tax residency is entirely subjective,” said San Francisco tax attorney Shail P. Shah. Shah specializes in disputes over tax residency and wrote an article titled “Social Distancing From California” after the Bracamonte ruling.
He pointed out that these rules essentially require judges to decide whether a California taxpayer truly intends to leave permanently and sever all ties with the state. For tech billionaires who have worked in Silicon Valley for decades and accumulated vast wealth there, proving this is no easy task. “If you are a billionaire with a large social network in California, frequently play golf at Pebble Beach, and grew up in Palo Alto, it’s hard to argue you have no plans to return.”
However, Jon D. Feldhammer, head of the San Francisco office of Baker Botts LLP and a tax attorney, said that many billionaires have already consulted him about the law, and they are seriously considering relocating to cut all ties with the “Golden State,” even planning to move their companies.
But isn’t it too late to act now? Shouldn’t they have taken steps last year?
Feldhammer responded that it might not be too late. In December last year, he and his team published an analysis listing eight possible ways to challenge the law—either from the federal constitutional level, the state constitutional level, or both. One of these involves the law’s retroactivity: if voters approve the tax in November, its scope would be retroactively applied to tax residents as of January 1, 2026. Although the U.S. Supreme Court has previously allowed retroactive changes to federal income and estate tax rules (for example, the Trump “Tax Cuts and Jobs Act” passed in July 2017 included several retroactive provisions), Feldhammer noted that the current Supreme Court’s attitude is cautious, and it may not accept the retroactive application of new taxes. His advice to billionaires is: “To preserve your challenge to the law’s retroactivity, it’s best to relocate before the vote, and the sooner the better.”
Beyond constitutional disputes, the enforcement of the law could face numerous obstacles.
To this end, the proposal includes many safeguards designed to prevent billionaires from undervaluing assets or hiding assets. For unlisted company assets, the default valuation method is “book value plus annual book profit times 7.5,” and the valuation cannot be lower than the last financing round valuation. If the taxpayer believes the valuation is too high, they can submit an appraisal report and other evidence for review. For personal assets like art and jewelry, valuations cannot be lower than their insured value. Funds donated to charities can be deducted from taxable assets, but taxpayers must sign a legally binding donation agreement by October 15, 2025. Additionally, real estate purchased in 2026 that is directly held and deemed to be for tax avoidance purposes will not be eligible for exemption.
Of course, the law still has a long way to go before becoming official.
A PwC analysis states that before submitting the proposal for voter approval, it must first be certified by the state government and gather 875,000 valid signatures by the end of June this year. Even if the proposal narrowly passes, it will likely face vigorous legal challenges from those subject to the tax. The drafters have attempted to address or dismiss potential legal challenges through specific provisions. In a “special report” published in December, four scholars (including three law professors and Emmanuel Saez, an economist at UC Berkeley and director of the Stone Center on Wealth and Income Inequality) emphasized that the federal ban on wealth taxes applies only at the federal level, and states have long had the authority to impose resident wealth and property taxes, provided they follow due process and other constitutional protections. The proposal also explicitly calls for amending the California Constitution to avoid state-level legal challenges.
Regarding the argument that “a wealth tax will cause billionaires to leave, leading to a long-term decline in state income tax revenue,” the four scholars dismiss it. David Gamage, a tax law professor at the University of Missouri and one of the proposal’s authors, said, “That’s just alarmist talk. It’s all talk, with no real basis.”
However, the nonpartisan California Legislative Analyst’s Office (LAO) disagrees. In a brief assessment released last December, the office stated that the law could cause California to lose hundreds of millions or even billions of dollars annually in personal income tax revenue. Feldhammer said this estimate might still be conservative. If the billionaires who are consulting him actually move their companies out of California, the state would not only lose the income tax from these billionaires but also the personal income tax from their employees and corporate income taxes.
California’s personal income tax rate is already the highest in the U.S., reaching 13.3%, including an additional 1% surcharge approved by voters in 2004 on income over $1 million. In 2012, voters approved three higher tax brackets for individuals earning over $250,000 or couples earning over $500,000, and this temporary policy was extended to 2030. The California Legislative Analyst’s Office noted that currently, half of the state’s personal income tax revenue comes from just 2% of the population—the wealthiest.
However, the scholars involved in drafting the proposal cite a recent paper by Saez and other economists—analyzing the tax payments of the individuals on Forbes’ list of American billionaires—that found billionaires pay only about 2.5% of California’s total personal income tax revenue. They explain that, unlike ordinary members of the top 2% (such as high-income executives, doctors, lawyers, small business owners), super-rich individuals have more means to avoid having their wealth classified as taxable income. For example, they can pledge stocks for loans to maintain a luxurious lifestyle instead of selling stocks and triggering capital gains taxes. The four scholars wrote in the proposal’s explanatory statement: “The Billionaire Tax will directly address this unfairness by taxing all wealth, whether or not it has been converted into taxable income.”
San Francisco tax attorney Shah said that what really worries him is that the controversy over the billionaire tax—despite his belief that it will ultimately be difficult to pass—may send the wrong signals and hinder the recovery of the San Francisco Bay Area from the pandemic downturn. “Right now, the booming AI industry is providing strong momentum for recovery, but everyone is worried that such tax measures could slow down the rebound. Too much of a good thing can be harmful.”
“Negative impacts are already happening and are still intensifying,” warned Feldhammer. He gave an example: suppose a hot startup’s founder becomes a paper billionaire by the end of 2026. If the company’s valuation then plummets and the founder doesn’t have time to cash out, they will still owe taxes on this nonexistent wealth. Moreover, even if the company’s valuation remains stable, the founder may have to sell stock to pay the wealth tax. The proceeds from stock sales are subject to a combined 37.1% federal and California capital gains tax, meaning they must sell more stock to cover the tax, which further dilutes their ownership stake.
Objectively speaking, in the race to tax the wealthy, California is not alone; it has peers. New York State and City have the highest combined personal income tax rates in the U.S., with a state top rate of 10.9% plus an additional 3.9% city tax. New Mayor Zohal Mamdani campaigned on increasing the city’s top income tax rate for incomes over $1 million to 5.9%, bringing the total combined rate to 16.8%. Despite many billionaires spending heavily to oppose her campaign, she was elected in November last year. This outcome undoubtedly worries the California camp, which is fighting the billionaire tax proposal.
