Avoiding the billionaire tax

Voters will decide in November whether or not to support Proposition 40, which would levy a one-time 5% tax on residents with net worths starting at $1 billion as a way to offset massive federal spending cuts expected to hit California’s poorest residents the hardest. If the midterm ballot measure becomes law, the state’s billionaires would only have until the end of the year to pursue aggressive outmaneuvering before needing to submit declarations of their net worth to a state tax board.

“Wealthy people have seen these taxes threatened year after year after year, and have been trained not to take them seriously,” said Matt Brown, a partner at the Orange County law firm Brown & Streza. “I think people were caught a little bit by surprise that this would become a ballot initiative this aggressive in its scope.”

But exactly what would be considered a covered asset in determining a person’s net worth under Prop. 40? For the most part, these would include:

• Stocks
• Bonds
• Business interests
• Venture capital
• Intellectual property
• Art
• Collectibles
• Vehicles
• Roth IRA or other Roth-type retirement accounts valued above $10 million
• Property valued at $1 million or more if it was transferred for less than market value prior to October 15^th
• Dependent assets of more than $50K
• Debts owed to the individual being assessed

What would the ballot measure not cover?

• Real property (except in the circumstances listed above)
• Pension plans.
• Some debts owed by the person being assessed would also be considered to reduce a person’s net worth and thus their exposure to Prop. 40’s accounting.

All of which has prompted the 200 or so billionaires in California to consider their options. (Note: there is no exact available figure for how many billionaires reside in California, but the Legislative Analyst’s Office has said, “California is home to a few hundred people with wealth over $1 billion.”)

The ultrawealthy have benefited from tax-planning strategies for years as a way of minimizing their income taxes. In light of the possible new levy, which could become the nation’s first on net worth, some have strategized a variety of options to get around the tax.

Most opponents and the media have focused on the obvious option of affected residents simply relocating out of California. Other possibilities include divorce as a way to break up assets to get individuals under the threshold. And for those who have a significant portion of their wealth tied up in fine art collections, there is also the possibility of moving this asset outside of California into tax-free luxury storage zones known as freeports, located in places like Geneva, Singapore and, in the U.S., Delaware. Items can be stored in these holding warehouses as a means of avoiding customs duties and other import taxes.

But there are several potential catches to all of these possibilities.

Because the proposition would be applied retroactively to those living here as of Jan. 1, 2026, moving now is a moot point.

On the art front, anyone seeking collector item exemptions must have relocated their art back in April, two months before the tax qualified for the ballot. California law requires collector items to be kept outside the state for at least 270 days in order to be disqualified as personal property. And California tax law doesn’t factor where an asset like high-value art is stored, only who owns it.

Both proponents and opponents for the tax say using divorce to split assets is a possible but unlikely scenario, given the potential consequences and remaining window of time. But dissolving a marriage also risks opening a person up to evasion penalties, and tax planners generally caution against such extreme actions.

Far more likely would be efforts to challenge asset valuation, restructuring ownership of businesses or other assets, challenging residency or putting more of their portfolio into an exempt asset like real estate.

Those too could face legal challenges and invite greater scrutiny from California tax regulators.

Far more likely would be efforts to challenge asset valuation, restructuring ownership of businesses or other assets, challenging residency or putting more of their portfolio into an exempt asset like real estate.

Because such high-wealth residents represent only about 0.0001% of the state’s population, the state tax board could in theory more readily examine each billionaire filing for undervaluation of net worth.

“The question is,” Brown posed, “how far down the street can you get?”

This all but certainly puts the fate of the billionaire tax in the hands of the courts. Tax attorneys such as Brown are advising clients to bring forward lawsuits that challenge the constitutionality of the measure, should it pass. Opponents question the legality of a retroactive tax, extended to all billionaires living in California at the start of 2026, and if the tax violates the due process clause of the 14th Amendment.

The tax proposal’s authors argue the Supreme Court has preserved the rights of the states to levy taxes. They wrote, in research published through UC Berkeley and the University of Missouri, that the federal income tax was retroactive when implemented in 1913, as well as any changes enacted to it. Taxes are also not unconstitutional because they only affect a small number of people — progressive income taxes would be under threat if that were the case.

“This is not how constitutional law works,” the authors wrote.

Baked into the tax’s text is an expedited legal process that would have the courts determine the validity of the tax within a year of the election. Taxpayers would have 60 days after its passage to file a lawsuit; the Superior Court would have until April to issue a ruling; and the state Supreme Court until November.

The other and maybe best alternative for opponents is the two competing measures also on the ballot in November: Props. 41 and 42.

As the Secretary of State reports, Prop. 41 would “prohibit new state taxes enacted after January 1, 2026, from exempting themselves from California’s voter-approved spending limit.” The SOS further notes that “Prop. 40 specifically exempts its revenues from certain constitutional spending formulas, so this provision would directly conflict.”

Prop. 42, meanwhile, would “prohibit new state personal property taxes and certain retroactive state taxes,” which would also put it into conflict with Prop. 40.

A variety of scenarios could result. If Prop. 40 passes and the others do not, it would move forward to those expected legal challenges. Litigation is also likely if both Prop. 40 and Prop 41 pass. In that case, the measure with the greater number of votes would prevail. Ditto with a case where Prop. 40 and Prop. 42 both pass, though court challenges are almost certain in any of these scenarios.

The expedited fallbacks of the tax come as the healthcare system in California nears a meltdown. Federal cuts forthcoming under President Donald Trump’s so-called One Big Beautiful Bill (U.S. H.R. 1) are expected to cost California between $30 and $35 billion annually. That loss in funding threatens to put nearly 100 hospitals at risk of closure, cost at least 1 million California Medi-Cal recipients their health coverage (with that figure possibly doubling by 2030) and thousands of healthcare workers their jobs.

“We have to get serious about this and stop talking about paintings and jewelry,” Dave Regan, president of SEIU-United Healthcare Workers and the main sponsor behind Prop. 40, told Capitol Weekly. “We are trying to solve a serious problem, and the billionaires need to start owning up to what is their responsibility.”

Whether voters agree will be determined on Nov. 3^rd.

Capitol Weekly editor Rich Ehisen contributed to this story.