The California Billionaire Tax Act (Proposition 40), scheduled for the November 3, 2026, ballot, proposes a one-time 5% tax on the net worth of billionaires. The tax applies to individuals who were California residents as of January 1, 2026, with net worth calculated as of December 31, 2026. The measure faces multiple federal and state legal challenges that could result in its partial or total invalidation by the courts.
Classification as an Excise Tax
Drafters structured the levy as an excise tax on the activity of “sustaining excessive accumulations of wealth” rather than a direct tax on property. Under California and federal legal precedents, courts determine a tax’s character by its economic substance rather than its statutory label.
Because the measure taxes net worth on a fixed snapshot date based on ownership—without requiring a sale, transfer, or realization event—it operates fundamentally as a property tax on tangible and intangible assets. If classified as a property tax, Proposition 40 conflicts with the California Constitution, which limits taxes on intangible property to 0.4% and requires uniform property taxation.
Although the proposition includes an embedded constitutional amendment to bypass these limits, opponents argue the changes may constitute an impermissible constitutional revision rather than a valid amendment, or violate the state’s single-subject rule for ballot initiatives.
Retroactivity Concerns
Proposition 40 applies to individuals who were residents on January 1, 2026, but the vote occurs in November 2026. Under U.S. Supreme Court precedent, retroactive tax changes are generally limited to modest revisions of existing taxes. Imposing a “wholly new tax” retroactively violates due process guarantees.
Because Proposition 40 is structured as a one-time tax tied to a single retroactive residency date, invalidating its retroactive application prior to the November election date would leave no prospective tax base intact. While drafters included a clause asking courts to apply “judicial reformation” to shift the residency and valuation dates forward, California courts historically refuse to rewrite tax statutes, citing separation-of-powers constraints.
Nexus and Apportionment
The measure taxes the global net worth of anyone residing in California on January 1, 2026, even if they establish domicile in another state later in the year. This creates significant constitutional issues under the Due Process and Commerce Clauses:
- Lack of Contemporaneous Nexus: Due process requires a minimum connection between the state and the asset or person being taxed at the time the tax applies. By calculating wealth on December 31, 2026, the law taxes former residents on wealth accrued outside California after their departure.
- 100 Percent Apportionment: Proposition 40 attributes 100% of a taxpayer’s net worth to California “without reduction or multiplier based on residency history.” This unapportioned model fails the “external consistency” standard under Oklahoma Tax Commission v. Jefferson Lines, which requires state taxes to reflect only the local component of the taxable activity.
- Internal Consistency Violations: The internal consistency test evaluates whether double taxation would occur if every state adopted an identical tax law. Because California claims full tax rights based on the January 1 snapshot while other states tax based on continuous residence, mid-year movers would face overlapping, uncredited tax liabilities.
- Optional Deferral Accounts (ODAs): Taxpayers with illiquid assets can use ODAs, allowing the state to take a deemed 5% equity stake that continues to accrue and apply to asset appreciation even after the taxpayer moves out of state. If cumulative tax liabilities approach or exceed the asset’s realizable value, the levy risks being deemed an unconstitutional confiscation of property.
- Rebuttal Mechanism and Floor: Taxpayers can challenge the 100% allocation by proving through “clear and convincing evidence” that their wealth was not substantially accumulated or sustained in California. However, the law imposes a statutory apportionment floor of 25%, forcing taxpayers to pay at least 25% even if they prove a lower connection, which impermissibly shifts the state’s burden of fair apportionment onto the taxpayer.
Family, Trust, and Anti-Avoidance Rules
To prevent tax avoidance, the measure includes broad lookback and attribution provisions that raise due process concerns:
- Trust Assets: The law taxes contributions made to non-grantor trusts after October 15, 2025. It captures trust assets even if the trust is administered out-of-state, has non-resident beneficiaries, and holds no California assets, provided a California billionaire previously transferred property to it.
- Spousal Aggregation: Proposition 40 requires a resident taxpayer to include 100% of a non-resident spouse’s worldwide assets in their tax base. This mandatory aggregation of separate, out-of-state property directly conflicts with Hoeper v. Tax Commission of Wisconsin, which prohibits measuring one person’s tax liability by another person’s property. If both spouses reside in different states with identical laws, the couple’s total wealth would be taxed twice.
- Debt Add-Backs: Liabilities owed to related parties (including ex-spouses from divorces finalized after October 15, 2025) are added back to net worth, taxing individuals on assets they no longer own.
Right to Travel and Strict Scrutiny
Under the U.S. Constitution, state laws that penalize interstate migration trigger strict scrutiny. By locking former residents into full tax liability for assets acquired or sustained post-departure, Proposition 40 deprives departing taxpayers of the tax benefits of establishing domicile elsewhere. This creates an unconstitutional burden on the right to leave the state.
Federal Obligations Exemption
Federal law (31 U.S.C. § 3124(a)) prohibits states from taxing U.S. Treasury bills, notes, and bonds. Proposition 40 does not explicitly exempt federal debt obligations. Federal preemption will force the state or courts to carve out U.S. Treasuries from the tax base, creating a legal route for taxpayers to reduce liability by shifting liquid assets into federal securities prior to the December 31 valuation date.
Appraiser Penalties and Excessive Fines
Evaluating hard-to-value assets, such as private startup equity, carries substantial valuation uncertainty. While taxpayers face up to a 40% penalty for liability understatements, certified appraisers face personal penalties of up to 4% of the total tax understatement.
Unlike federal appraiser penalties—which are capped at 125% of the appraisal fee—Proposition 40 imposes uncapped penalties on appraisers based on the taxpayer’s total tax liability. These uncapped fines on third parties raise challenges under the Eighth Amendment’s Excessive Fines Clause for being grossly disproportionate to good-faith valuation errors.
Limits of Judicial Reformation
Drafters embedded language asking courts to reform individual sections if declared unconstitutional. However, under California precedents (Kopp v. Fair Political Practices Commission), courts refrain from rewriting tax statutes when doing so requires legislative line-drawing or choosing among multiple policy alternatives. Because curing Proposition 40’s defects would require altering snapshot dates, establishing new apportionment formulas, and restructuring trust rules, courts are likely to strike down the statute in its entirety rather than attempt widespread judicial rewriting.
Source article: taxfoundation.org
