California voters are faced with a potentially significant ballot initiative known as the “2026 Billionaire Tax Act” (the “Act”). If the initiative gathers the requisite signatures to qualify for the November ballot, California voters will decide whether to enact a one-time 5% wealth tax on billionaires who are California residents.

The goal of the Act is to raise funding for state health care, education, and food programs. If passed in November, the wealth tax may impact approximately 200 billionaires who reside in California.

Elected officials, including Governor Gavin Newsom and San Jose Mayor Matt Mahan, have expressed concerns that this measure could drive high-net-worth individuals and capital outside of California. High-net-worth Californians appear to be responding with their feet: the national media have already reported on multiple billionaires’ departure from California. Recent polling shows about 48% of surveyed voters currently support the tax.

Application of California Residency Rule

Application of the wealth tax depends on a taxpayer’s California residency status on January 1, 2026. California residency is based on a taxpayer’s facts and circumstances, including time spent, principal residence, family ties, and other factors outlined in the California Franchise Tax Board’s (“FTB”) Guidelines for Determining Resident Status.

To avoid the wealth tax, a billionaire would need show that she was a nonresident of California before January 1, 2026. That means she would need to at least show: (1) the abandonment of her prior California domicile; (2) physically moving to and residing in the new locality; and (3) the intent to remain in the new location permanently.

In general, the FTB often adopts aggressive arguments, and the taxpayer bears the burden of proving nonresidence. As a result, a billionaire who purportedly left California prior to January 1, 2026 may still be subject to the wealth tax provided she has not sufficiently established a new domicile.

Calculating the Proposed Wealth Tax

The Act imposes a one-time 5% tax on individuals with a “net worth” of $1 billion or more as of December 31, 2026.

A taxpayer may pay the wealth tax in full with their 2026 income tax return (filed in 2027) or elect to pay in five equal annual installments, with unpaid balances subject to a 7.5% annual nondeductible charge.

California residents are generally subject to tax on 100% of their net worth, regardless of the location of that wealth. The Act permits an alternative apportionment method when a taxpayer demonstrates she did not accumulate the wealth (or maintain it) in California. Even then, the apportioned percentage generally cannot fall below 25%, unless required under federal or state law.

For certain liquidity-constrained taxpayers, the Act offers an optional deferral account (“ODA”). Through an ODA, a qualifying taxpayer may enter into a binding contract with California attaching certain illiquid assets, like private stock, to defer payment of the tax liability until such assets are sold. A taxpayer may elect an ODA only if their wealth tax liability exceeds the total value of their publicly traded assets. The taxpayer must file annual ODA reports with the state until all tax liabilities are satisfied.

How to Determine Net Worth under the Act

The Act requires billionaires to calculate their net worth as of December 31, 2026. In this respect, the Act applies a two-step analysis: first, a determination of whether the individual was a resident of California on January 1, 2026; and if so, second, whether that individual’s net worth exceeded $1 billion on December 31, 2026.

Treatment of Spouses

A married couple is treated as one taxpayer under the Act. This means their combined worldwide assets are aggregated to determine if their net worth exceeds $1 billion.

Valuation of Public and Private Business Interests

Publicly traded shares are valued at their fair market price as of December 31, 2026. By contrast, private company shares are valued under a formula that considers book value and average profits, or, if necessary, through a certified appraisal. Profits interests are also included in net worth, and the valuation must reflect the highest possible share of profits the taxpayer may earn.

Special Rule for Disproportionate Voting Power

If a taxpayer’s voting power exceeds her economic ownership in a company, the Act requires valuing her interest at that higher voting power percentage, potentially producing a valuation far above her actual economic stake. The Act’s unclear treatment of dual class shares means founders could be taxed either on market value as of December 31, 2026 if the shares are deemed publicly traded, or a higher voting-based value if the shares are treated as non-publicly traded.

Excluded Asset Categories

The Act excludes certain assets from the net worth calculation: directly-held real property, most retirement accounts, up to $5 million in combined value of assets like art, collectibles, non-publicly traded financial instruments, intellectual property rights, debts and other liabilities owed to the taxpayer, and vehicles. Real property is entirely excluded from the computation of net worth because it is already subject to California’s existing property-tax regime.

Treatment of Liabilities

Debts and liabilities generally reduce a taxpayer’s net worth. Fully recourse debts reduce value dollar-for-dollar; however, nonrecourse debts are limited to the value of the collateral. Guarantees of another’s debt, related-party debts, and certain contingent liabilities reduce the net worth calculation. Pledges to charities reduce net worth only if they were legally binding and made before October 15, 2025.

Treatment of Out-of-State Tangible Personal Property

Tangible personal property located outside California is excluded from net worth if outside the state for at least 270 days in 2026.

Treatment of Trusts and Transfers

Consistent with income tax rules, assets in a grantor trust are included in the taxpayer’s net worth calculation. The Act requires taxpayers to include the value of property they have transferred to any trust other than a grantor trust or tax-exempt trust. If a taxpayer transferred property to a trust in 2025, the Act requires inclusion of 75% of its value in their net worth calculation. Additionally, beneficiaries are treated as owners of trust assets to the extent they have a right to receive those assets, even if nothing has actually been distributed to them.

Potential Constitutional and Tax Classification Issues with the Act

While several potential legal issues may prevent the enforceability of the Act if passed in November, the below highlights two for consideration.

First, as a wealth tax, there are legitimate questions regarding its constitutionality under federal law. In Moore v. United States, 602 U.S. 572 (2024), the U.S. Supreme Court considered whether a mandatory repatriation tax (“MRT”) violated the U.S. Constitution as a one-time retroactive tax on American shareholders of U.S.-controlled foreign corporations. The taxpayers argued that the Constitution requires income to be realized before it can be taxed and contended that the MRT taxed income they had not personally realized.

The Supreme Court upheld the constitutionality of the MRT, ruling that it did tax realized income, reasoning that controlled foreign corporations first realize the income and then attribute that income to shareholders for tax purposes. Four justices disagreed, maintaining that the Constitution requires shareholders to realize income not merely through the entity.

Importantly, the majority stated that its decision did not address “distinct issues that would be raised by taxes on … wealth, net worth … or taxes on appreciation.” Thus, Moore intentionally leaves open questions about the constitutionality of taxes targeting wealth, net worth, or appreciation. Central to that inquiry is whether appreciation of wealth qualifies as realized income. This judicial restraint highlights the legal uncertainty surrounding efforts to tax wealth directly.

Second, it is possible that the wealth tax may constitute a direct tax on property despite its “excise tax” label. Supporters may frame this as an excise tax on the activity of accumulating wealth as a California resident, while opponents may counter that this functions as a property tax that cannot exceed 0.04% on the value of certain assets as provided under the California constitution.

Conclusion

The proposed wealth tax presents a complex framework that requires careful attention to residency, valuation, trust structures, and anti-avoidance rules. As drafted, the Act raises a number of legal, administrative, and practical considerations for high-net-worth individuals. Whether or not the initiative ultimately passes, its detailed approach to defining and capturing wealth signals a significant shift in how states may seek to generate tax revenue in upcoming years.

For more information, please contact Andrew Schmidt, Christopher Karachale, or another member of the Hanson Bridgett tax team.