California Billionaire Tax Could Be Struck Down Before It Raises A Dime

California voters could approve a new 5% tax on billionaires in November only to watch courts strike it down before the state collects a dime, according to a new Tax Foundation analysis.

Proposition 40, the California Billionaire Tax Act, would impose a onetime tax equal to 5% of billionaires’ net worth. But the measure is riddled with constitutional vulnerabilities involving retroactivity, interstate taxation, property rights and the constitutional right to travel, according to Jared Walczak, a policy analyst and senior fellow at the foundation.

“If California adopts a wealth tax, the only undisputed winners will be the lawyers,” he said.

He argues that California could drive wealthy residents and future entrepreneurs out of the state, endure years of costly litigation and ultimately collect no additional revenue if courts invalidate the measure.

“If courts invalidate the tax, California will have the worst of all worlds,” Walczak wrote, pointing to the potential loss of wealthy taxpayers, a chilling effect on startup founders and “not a single dollar in new revenue.”

The first problem is fundamental: What kind of tax is it?

Proposition 40 calls the levy an excise tax on the “activity” of “sustaining excessive accumulations of wealth.” But Walczak says courts look at what a tax actually does, not what lawmakers call it.

“A wealth tax is, fundamentally, a tax on property,” he wrote.

That distinction matters. California’s constitution restricts property taxation, including a 0.4% cap on taxation of intangible property and uniformity requirements. Proposition 40 attempts to overcome those restrictions with constitutional amendments authorizing the tax.

Those amendments could face legal challenges claiming they amount to an impermissible constitutional revision or violate California’s single-subject rule, according to the analysis.

The tax’s retroactive design may pose an even bigger problem.

Proposition 40 would apply to billionaires who were California residents on January 1, 2026, even though voters will not decide the measure until November 3. Their tax would be calculated using wealth measured on December 31.

That means someone who left California months before the election could still face a tax on 100% of their year-end wealth.

Walczak points to U.S. Supreme Court precedent distinguishing modest retroactive changes to existing taxes from retroactive imposition of a “wholly new tax.” Courts have struck down the latter.

If the January 1 residency date is unconstitutional, Walczak argues, there may be no easy fix because the measure contains no prospective residency date.

“The courts may have no choice but to strike the tax down entirely,” he wrote.

Taxing Beyond Borders

The measure could also run into constitutional restrictions on states taxing people and property beyond their borders.

A billionaire who lived in California on January 1 but moved elsewhere January 2 could still owe California tax based on 100% of wealth measured on December 31, including wealth accumulated after leaving.

While most states use apportionment formulas to determine how much a taxpayer owes in different jurisdictions, in this case California is apportioning 100% to itself—which Walczak argues is effectively no apportionment at all.

The anti-tax-avoidance provisions of the law go further.

Certain assets transferred to trusts could still be attributed to the billionaire. The measure also can attribute a nonresident spouse’s out-of-state wealth to a California resident spouse. Walczak argues identical wealth taxes adopted by multiple states could result in the same assets being taxed multiple times.

Proposition 40 may also collide with federal law because its tax base does not exclude U.S. Treasury securities and other federal obligations, which generally are exempt from state taxation.

Then there are the appraisers.

The valuation of stakes in startups and private companies can be highly subjective. Yet under Proposition 40, appraisers could face penalties of up to 4% for understating tax liabilities, with no cap tied to their appraisal fees, raising constitutional concerns under the Excessive Fines Clause of the Eighth Amendment.

The initiative’s authors anticipated legal challenges and included provisions asking courts to reform or sever unconstitutional portions rather than invalidate the entire law.

But California courts historically have been reluctant to rewrite tax statutes when doing so requires judges to make policy choices belonging to legislators or voters.

“The sheer number of defects, and the degree to which addressing one can further expose others, points toward invalidation, not modification,” Walczak concluded.

Even if Prop 40 survived a broad constitutional challenge, that would not necessarily end the litigation. Individual billionaires could bring separate challenges over how the tax applies to them, he added.