On November 3 this year, California voters will decide whether to pass the nation’s first state-level net asset tax.
Supporters of the “Billionaires Tax Initiative” estimate that this “one-time” tax will collect about $100 billion from approximately 200 California residents (whose net assets reached the threshold as of January 1, 2026). According to public estimates of net assets, just four individuals would be liable for nearly $40 billion in taxes.
The operation of this tax system is quite unique and easily misunderstood. The first $1 billion of net assets for affected residents is exempt from tax, with a 55% marginal tax rate applying to the next $100 million, generating a tax of $55 million. Net assets exceeding $11 billion would be taxed at 5%.
None of the 200 affected residents would have spare cash amounts in the tens of millions of dollars. To pay the tax, they would be forced to sell assets, incurring federal and state income taxes before paying the wealth tax. This sets this proposal apart from the federal estate tax, which is levied upon death and typically does not trigger additional income taxes through asset sales.
For example, a resident holding founder shares with a zero cost basis would need to sell approximately $88 million in stock to raise the $55 million tax due on the $11 billion asset (which would generate around $32 million in income tax before paying the wealth tax). If the funds used to pay the wealth tax come from exercising non-qualified stock options or selling non-capital assets, the income tax cost would be even higher. In these scenarios, the combined tax burden far exceeds the wealth tax itself, essentially amounting to confiscation.
The problems do not end there. While the nominal tax rate for net assets exceeding $11 billion is 5%, accounting for the need for residents to liquidate assets to pay this tax will significantly increase the effective tax rate once income taxes are factored in. What was initially touted as a mild wealth tax quickly escalates into a forced liquidation mechanism with rising costs.
Even if approved by voters, this tax system will face judicial scrutiny, posing a formidable challenge. The proposal characterizes the tax as a consumption tax, but consumption taxes target specific behaviors or transactions, not the passive accumulation of wealth.
If the tax does not qualify as an effective consumption tax, it falls under property tax (including intangible asset tax), immediately conflicting with longstanding provisions in the California Constitution regarding property tax collection, tax uniformity, and limitations on voter-approved taxation.
The proposal’s flaws on other constitutional levels make the issue even more complex. It will likely trigger lawsuits concerning arbitrary valuation rules, unreasonable classifications, and insufficient appeal rights. Of particular concern is its retroactive effect: voters would decide in November 2026 whether to levy taxes based on their residency status on January 1 of the same year. For a new tax system, such extensive retroactive taxation is extremely rare, raising legal doubts and fundamentally destabilizing effects.
If the proposal passes, its constitutionality will undergo years of litigation. Many individuals impacted by the tax changes are unlikely to wait for the final outcome. Faced with unprecedented taxation, forced asset sales, and retroactive tax risks, a significant number of taxpayers may choose to relocate to states with clearer and more predictable tax systems. This risk is not hypothetical – California already heavily relies on a narrow tax base, with the top 1% of income earners contributing approximately 40% of the state’s personal income tax revenue.
Just a few high-net-worth individuals leaving could have far-reaching financial impacts beyond the target group, affecting all California residents who rely on state and local tax revenues for their livelihood. This tax system aimed at an extremely small number of individuals could ultimately become one of the most profound and risky cases in California’s history of tax experiments requested for voter approval.