In a move that could reshape the tax landscape for the ultra-wealthy, California voters will decide in November whether to enact Proposition 40. This ballot measure proposes a one-time 5% tax on residents with net worths starting at $1 billion aiming to offset massive federal spending cuts expected to impact the state’s most vulnerable residents.
The proposed tax has sparked a wave of strategic planning among California’s approximately 200 billionaires, who would have until the end of the year to navigate the new tax landscape if the measure passes. The tax would be applied retroactively to those living in California as of January 1, 2026 leaving little room for maneuver.
What’s Covered Under Proposition 40?
The proposed tax would cover a wide range of assets, including stocks, bonds, business interests, venture capital, intellectual property, art, collectibles, vehicles, and high-value retirement accounts. Additionally, property valued at $1 million or more, if transferred for less than market value prior to October 15th, and dependent assets of more than $50K would be included. However, real property and pension plans would be exempt, as would certain debts owed by the person being assessed.
Strategies to Mitigate the Tax
In response to the proposed tax, California’s billionaires are considering various strategies to mitigate its impact. Some of the most discussed options include:
Relocation and Asset Movement
One obvious strategy is relocation. However, due to the retroactive nature of the tax, moving now would not help those who were residents as of January 1st. Another option is moving assets, such as fine art collections, to tax-free luxury storage zones known as freeports in places like Geneva, Singapore, and Delaware. However, California law requires collector items to be kept outside the state for at least 270 days to be disqualified as personal property, and the tax law doesn’t factor in the location of the asset.
Divorce and Asset Restructuring
Divorce as a means to break up assets and avoid the tax has been discussed, but it is considered an unlikely scenario due to the potential consequences and the tight timeframe. More likely are efforts to challenge asset valuation, restructure ownership of businesses or other assets, challenge residency, or put more of their portfolio into exempt assets like real estate. However, these strategies could face legal challenges and invite greater scrutiny from California tax regulators.
The Legal Battle Ahead
The fate of the billionaire tax may ultimately lie in the hands of the courts. Tax attorneys 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 and whether it violates the due process clause of the 14th Amendment. The tax proposal’s authors argue that the Supreme Court has preserved the rights of the states to levy taxes and that taxes are not unconstitutional because they only affect a small number of people.
The tax’s text includes 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 Broader Context
The proposed tax comes as California’s healthcare system faces significant challenges due to expected federal cuts. The so-called One Big Beautiful Bill (U.S. H.R. 1) is projected to cost California between $30 and $35 billion annually, putting nearly 100 hospitals at risk of closure and threatening the health coverage of at least 1 million California Medi-Cal recipients.
As the debate continues, the outcome of the November vote will not only shape the tax landscape for California’s billionaires but also have significant implications for the state’s healthcare system and its most vulnerable residents.
