California's $100 Billion Wealth Tax Gamble: Racing Against Time and Constitutional Questions

As of January 2026, California stands at a fiscal and political crossroads. The state’s proposed wealth tax—set for a November 2026 voter referendum—has ignited an unprecedented clash between progressive tax policy and capital preservation. This isn’t merely a technical adjustment to existing tax codes; it represents a fundamental reimagining of how California approaches wealth inequality and revenue generation.

The proposal targets the state’s 200+ billionaires with a one-time 5% levy on their net assets, projected to generate approximately $100 billion between 2027 and 2031. Unlike traditional income taxes, this wealth tax would apply to a broader spectrum of holdings: equity in private and public companies, personal assets exceeding $5 million, and retirement accounts over $10 million. What makes this approach particularly distinctive is its attempted workaround for liquidity issues—taxpayers can spread payments over five years or defer taxes on illiquid assets through “selective tax deferral accounts,” delaying obligations until asset sales occur.

The Economic Stakes: Why California’s Tax Approach Matters

The timing is hardly coincidental. California’s economy, particularly the San Francisco Bay Area’s artificial intelligence boom, remains in fragile recovery. Critics—including Governor Gavin Newsom and major business associations—contend that a wealth tax could fracture this momentum precisely when tech innovation is driving regional growth.

The underlying economic argument hinges on a contentious claim: billionaires currently pay disproportionately low effective tax rates. Four scholars involved in drafting the proposal calculated that California’s billionaires contribute only about 2.5% of the state’s total personal income tax revenue, despite commanding enormous wealth. This disparity exists because ultra-wealthy individuals possess financial strategies unavailable to ordinary high earners. They can pledge stocks as collateral for loans, funding lavish lifestyles without triggering capital gains taxes. They can structure holdings through trusts and corporate entities to minimize taxable income conversion.

Yet the Office of Legislative Analysts—California’s nonpartisan fiscal watchdog—issued a sobering counterpoint in December. The office estimated the proposal could cost California hundreds of millions, potentially even more, in lost personal income tax revenue annually. The cascade effect is straightforward: if billionaires and their enterprises relocate, California loses not just their individual income taxes but also payroll taxes from their employees and corporate income taxes from their companies.

This fiscal tension becomes sharper when considering California’s existing tax burden. The state already maintains the nation’s highest income tax rate at 13.3%, including a 1% surtax on incomes exceeding $1 million (passed in 2004) plus additional brackets for high earners implemented in 2012 and extended through 2030. Approximately half of California’s individual income tax revenue comes from just the wealthiest 2% of residents.

The Great California Relocation Calculation: Moving Before the Deadline

The tax’s effective date triggers a peculiar incentive structure. Residency is determined as of January 1, 2026, meaning wealthy individuals needed to establish non-California residency before this date to potentially escape the levy. The tax base is measured as of December 31, 2026, giving those who successfully relocate a narrow window.

Some billionaires have reportedly acted on this timeline. Most notably, Google co-founder Larry Page purchased two Miami properties for $173.5 million in December 2025, with his affiliated companies simultaneously shifting operations out of California. Whether this constitutes genuine relocation or tax-avoidance positioning remains contested.

However, California tax authorities have developed a formidable reputation for challenging residency claims. In September 2025, California’s Office of Tax Appeals ruled that comedian Russell Peters—despite owning Nevada property, maintaining a Nevada driver’s license, holding three Nevada-registered companies, and claiming Canadian residency—must pay back taxes for 2012-2014 because his time-spent analysis, property ownership in California, and family ties proved more decisive than his declared intentions.

The Peters precedent draws from an even broader standard established in the 2021 Bracamonte case, where a couple attempting to escape $17 million in taxes from a business sale by relocating to Nevada lost their appeal. California courts now employ comprehensive factor analysis: state registration records, personal affiliations, actual residence time, property ownership, and evidence of intent to permanently sever ties with the state.

For tech entrepreneurs who spent decades in Silicon Valley, proving permanent departure becomes extraordinarily difficult. As one San Francisco tax attorney notes, “If you’re a billionaire with a massive social network in California, regularly play at Pebble Beach Golf Links, and grew up in Palo Alto, arguing you don’t intend to return to California is an uphill battle.”

Yet tax lawyers consulting with wealthy clients report that several billionaires are seriously contemplating comprehensive relocation—physically leaving California, moving their businesses, and severing professional ties. The question isn’t whether moving is possible, but whether the legal and practical costs justify the effort.

Constitutional Battlegrounds and Implementation Minefields

Before reaching voters in November, the proposal must clear procedural hurdles. It needs certification by state authorities and 875,000 valid voter signatures by June 2026. Even then, passage would likely trigger years of litigation.

The constitutional vulnerabilities are substantial. Lawyers at Baker Botts LLP outlined eight potential legal challenges spanning federal and state constitutional grounds. One particularly novel argument concerns retroactivity: if voters approve the tax in November 2026, its application would retroactively apply to residency status as of January 1, 2026. While the U.S. Supreme Court has permitted retroactive amendments to federal income and estate taxes, the current Court’s nuanced stance on novel tax mechanisms remains uncertain. This retroactivity issue motivates urgent action for those considering relocation—moving before the November vote provides stronger legal defense against retroactive application.

Four scholars participating in the bill’s drafting defend its constitutionality on federalism grounds. They argue that wealth and property tax authority has “long been recognized” as a state power, provided due process protections apply. The proposal even contemplates amending the California State Constitution to preempt state-level constitutional challenges.

Beyond constitutional questions, implementation presents staggering practical difficulties. The proposal includes elaborate safeguards against asset undervaluation: private company equity defaults to “book value plus seven and one-half times annual book profit,” with valuations capped at no lower than the most recent financing round. Personal assets like art and jewelry cannot be valued below insured amounts. Charitable donations are deductible only if donation agreements are executed before October 15, 2025. Direct real estate purchases in 2026 cannot claim exemption if deemed tax-motivated.

These restrictions attempt to prevent the very behaviors that make wealth taxation difficult: hiding assets, claiming inflated valuations for deductions, or deliberately deflating valuations for tax purposes.

When Revenue Projections Meet Political Reality

The proposal’s revenue assumptions depend on 200+ California billionaires actually remaining subject to the tax. Four academics estimated approximately $100 billion in collections based on Forbes billionaire valuations, with proceeds funding Medicaid program gaps between 2027 and 2031.

Yet tax law professors point out that these projections contain optimistic assumptions about compliance and residency stability. One consultant to multiple billionaires warns that if just several of his clients execute comprehensive relocations, California’s revenue losses—from personal, corporate, and payroll taxes—could dwarf projections and render the wealth tax economically counterproductive for the state.

The proposal’s supporters, including economist Emmanuel Seth at UC Berkeley’s Stone Center for Wealth and Income Inequality, dismiss relocation concerns as “alarmist” with “no real basis in reality.” They argue this represents talking without corresponding action. Yet the legal gray areas around residency determination, combined with real precedents of successful California tax challenges, suggest the relocation risk may be more concrete than supporters acknowledge.

The Broader Context: California Isn’t Alone in Taxing Ambition

California’s wealth tax proposal reflects a regional trend in higher-tax-rate states. New York City, which already maintains the nation’s highest combined state and city income tax rate (10.9% state plus 3.9% city), recently elected Mayor Zohran Mamdani, who campaigned on raising the city-level top rate on incomes exceeding $1 million to 5.9%, bringing combined rates to 16.8%. Despite billionaire-funded opposition to his campaign, Mamdani won election in November 2025.

This “tax the rich” movement across multiple states reflects genuine fiscal pressures and growing wealth concentration. However, it also reveals a strategic vulnerability: wealthy, mobile individuals have options. As California’s situation demonstrates, the real question isn’t whether to tax billionaires, but whether particular tax structures can survive legal and practical challenges when the taxed population possesses resources to resist.

The proposal faces a November vote. Between now and then, California will discover whether its carefully constructed legal framework, its demonstrated enforcement resolve, and its fiscal incentives prove sufficient to overcome constitutional objections, implementation obstacles, and the fundamental challenge posed by individuals determined to preserve wealth across state lines.