Candice Horbacz
California’s ambitious California Billionaire Tax Act (CBTA), slated for the November 3, 2026, ballot as Proposition 40, is poised to trigger a cascade of complex legal battles that could render it ineffectual, even if approved by voters. Legal experts widely anticipate that the only clear beneficiaries of this controversial measure, designed to levy a 5 percent one-time tax on the net worth of billionaires, will be the legal professionals tasked with navigating its intricate and arguably unconstitutional provisions. The proposed tax is vulnerable to legal challenges on multiple fronts, including as-applied challenges against specific individuals, objections to specific provisions like its snapshot residency and valuation dates, and fundamental constitutional questions regarding the tax’s legality as a whole.
Genesis of the Proposal: A Look at California’s Fiscal Landscape and Progressive Ambitions
The push for a wealth tax in California emerges from a broader national and international debate over wealth inequality and how best to fund public services. As one of the world’s largest economies, California faces perennial challenges in balancing its budget, addressing social disparities, and funding critical infrastructure and services. Proponents of the CBTA, including leading academics and progressive advocates, argue that a tax on extreme wealth is a fair and necessary mechanism to generate substantial revenue from those most able to contribute, thereby mitigating wealth concentration and supporting the state’s fiscal health. They estimate that the measure could generate billions in revenue, tapping into the vast fortunes of California’s ultra-wealthy. With California home to a significant proportion of the world’s billionaires—a 2023 Forbes report noted over 100 billionaires residing in the state, collectively holding trillions in assets—the potential revenue pool is undeniably large. Proponents also suggest that the tax is designed to prevent tax avoidance by those contemplating leaving the state.
However, critics, including business groups and conservative think tanks, contend that such a tax would be economically damaging, discouraging investment, innovation, and entrepreneurship in a state already grappling with high costs of living and doing business. They warn of an exodus of high-net-worth individuals and startup founders, undermining California’s economic dynamism. This concern is amplified by the state’s existing tax burden, which is among the highest in the nation.
A Contentious Timeline: Key Dates and Retroactive Provisions Fueling Legal Dispute
At the heart of many legal challenges are the CBTA’s specific dates. The measure proposes a one-time 5 percent tax on the net worth of billionaires who resided in California as of January 1, 2026, with wealth measured on December 31, 2026. Given that Proposition 40 will appear on the November 2026 ballot, the residency "snapshot" date predates the potential adoption of the tax by more than 10 months. This retroactivity is a significant point of contention.
While retroactive tax modifications are not inherently illegal and some have survived judicial scrutiny, the U.S. Supreme Court has drawn a critical distinction between "modest revisions" to existing taxes and the imposition of a "wholly new tax." In cases like Blodgett v. Holden (1927) and Untermyer v. Anderson (1928), the Court struck down retroactive applications of new taxes, even when taxpayers had "constructive notice" that such a tax might be forthcoming. Legal experts argue that the CBTA, as a novel wealth tax, falls squarely into the "wholly new tax" category, making its retroactive residency provision highly vulnerable to due process challenges.
The ordinary remedy for unconstitutional retroactivity is to apply the tax prospectively. However, because the CBTA is designed as a one-time levy with a single, retroactive residency date, striking down any application prior to its potential November 2026 enactment would leave virtually no part of the tax intact. Recognizing this vulnerability, the measure’s drafters embedded a "safety valve," explicitly asking courts to engage in "judicial reformation" to establish later dates if the chosen dates are deemed unconstitutional. Yet, as discussed later, California courts have historically been reluctant to rewrite tax laws, citing concerns about judicial overreach and separation of powers. Proponents maintain that the early residency date is crucial to prevent pre-emptive departures by billionaires seeking to avoid the tax, arguing it’s a necessary anti-avoidance mechanism. Critics counter that this rationale directly infringes on due process rights by punishing actions taken before a law even exists.
The "Excise Tax" Gambit: A Disputed Characterization and its Constitutional Fallout
To circumvent California’s constitutional limitations on property taxation, the CBTA defines the wealth tax as an "excise tax" on the "activity" of "sustaining excessive accumulations of wealth." This linguistic maneuver, however, is unlikely to withstand judicial scrutiny. Both California and federal courts have consistently held that the true character of a tax is determined by its substance, not by its label. Merely rebranding a property tax as an excise tax on the "activity of sustaining ownership" does not alter its fundamental nature. As established in cases like Ingels v. Riley (1936), "the law respects form less than substance."
Fundamentally, a wealth tax is a tax on property—tangible and intangible—triggered by ownership on a fixed date, measured against net worth, and imposed without any transaction, transfer, or realization event. The act of "sustaining" wealth is indistinguishable from the act of "owning" it. Therefore, legal analysts widely conclude that the CBTA is, in essence, a property tax.
This characterization is critical because California’s state constitution imposes a 0.4 percent cap on the taxation of intangibles and requires property taxes to be uniform. The proposed 5 percent wealth tax undeniably conflicts with both these provisions. The drafters acknowledged this conflict in their white papers, attempting to resolve it by embedding a constitutional amendment within the measure itself. This amendment would authorize the one-time tax "notwithstanding any other provision of the constitution with which it might conflict."
However, ballot measures in California are permitted to amend the constitution but not to "revise" it – a distinction that hinges on how fundamental and sweeping the proposed changes are. Legal scholars question whether the CBTA’s constitutional elements constitute an impermissible revision, rather than a mere amendment. If courts deem it a revision, the state constitution’s property tax limits would apply, and the "excise tax" label would fail to save it. Furthermore, the measure could violate California’s "single subject rule" for ballot initiatives, which mandates that initiatives address only one subject, leading to its invalidation. Paradoxically, the attempt to frame the tax as an excise tax could also complicate federal constitutional challenges, particularly regarding retroactivity and apportionment, as it emphasizes taxing a "status" rather than a transaction or property ownership, bolstering arguments that it is a "wholly new tax."
Overreach on Jurisdiction: Nexus, Apportionment, and the Right to Travel
The CBTA faces formidable challenges under the Due Process and Commerce Clauses of the U.S. Constitution, particularly concerning its expansive reach over former residents and out-of-state assets.
Under the Due Process Clause, states must demonstrate a "definite link, some minimum connection, between a state and the person, property or transaction it seeks to tax." This connection must exist at the time the interest is being taxed, as affirmed in North Carolina Department of Revenue v. Kimberley Rice Kaestner 1992 Family Trust (2019). The CBTA, however, explicitly taxes former residents—billionaires who may have left California earlier in 2026—based on their wealth as of December 31, 2026. For a mid-year mover, neither the individual nor their property may have any link to California at the valuation date. Property acquired after departure, or even before moving to California, would also be subject to the tax, further severing any legitimate nexus. Proponents argue that the tax obligation attaches while the person is still a resident, and the December 31 valuation merely measures it. Critics counter that this logic could justify taxation years after departure, fundamentally undermining the principle of contemporaneous connection.
The tax also appears to violate the Commerce Clause, which prevents states from enacting laws that unduly burden interstate commerce. The four-prong test established in Complete Auto Transit, Inc. v. Brady (1977) requires a tax to have a substantial nexus, fair apportionment, non-discrimination, and a fair relationship to state services provided. The CBTA struggles with the "fair apportionment" and "internal consistency" requirements.
Internal consistency dictates that if every state adopted an identical tax regime, it should not result in double taxation or greater burdens on interstate movers than on stayers. The CBTA’s 100 percent apportionment method, applying to a resident’s worldwide assets, creates a high risk of double taxation. If a taxpayer’s residency is disputed between two states, both with identical wealth taxes, they could be deemed residents by both and taxed twice on 100 percent of their wealth. While the CBTA offers credits for wealth taxes paid to other states, these credits are based on the number of days of residence in another state—a metric irrelevant to California’s own 100 percent unapportioned tax. This disconnect means the credits would often be inadequate, leading to scenarios where a taxpayer is taxed on more than 100 percent of their wealth.
Furthermore, the state’s ability to tax all assets of a resident taxpayer, wherever and whenever acquired, traditionally ceases once that taxpayer becomes a nonresident. If California asserts the right to tax a former resident’s assets post-departure, it creates a direct conflict with the new domiciliary state’s claim under an identical tax structure. This problem is exacerbated by the CBTA’s Optional Deferral Accounts (ODAs). For illiquid assets, the state effectively becomes a co-investor, taking a deemed 5 percent stake collected when value is realized. If these assets appreciate after a taxpayer leaves California, the state would tax all subsequent appreciation. If the taxpayer’s new state also implemented an identical wealth tax, it too would tax 100 percent of the wealth, including the appreciation already claimed by California, resulting in blatant double taxation. For liquidity-constrained private business owners, these "optional" deferrals may not be genuinely optional, potentially turning the levy into a "confiscation of property" rather than a tax, as the Supreme Court noted in Brushaber v. Union Pacific Railroad Co. (1916), if liability approaches or exceeds realizable value.
The CBTA also fails the "external consistency" test, which requires apportionment to reasonably reflect the in-state component of a taxable event (Oklahoma Tax Commission v. Jefferson Lines, Inc., 1995). By attributing 100 percent of wealth to California for anyone deemed a resident on January 1, 2026, regardless of where that wealth was generated or where they resided for the rest of the year, the measure repudiates true apportionment. This also implicates the "fair-relation" prong, as it’s hard to justify California providing services or protections to wealth accrued after a taxpayer’s departure.
In a highly problematic concession, the drafters included a mechanism for "as-applied" challenges, allowing taxpayers to prove, by "clear and convincing evidence," that their wealth was not substantially accumulated or sustained in California. However, even if successful, the measure still imposes a 25 percent apportionment floor. This provision is seen as an explicit commitment to unconstitutional taxation, as it mandates a minimum tax even when a taxpayer can demonstrate a lesser amount is justified. Moreover, it impermissibly shifts the burden of ensuring fair apportionment from the state to the taxpayer, a responsibility traditionally borne by the taxing authority.
The "Right to Travel" is another potential constitutional battleground. The Supreme Court has repeatedly affirmed the right to travel and subject laws penalizing its exercise to strict scrutiny (Shapiro v. Thompson, 1969). While the CBTA taxes movers and non-movers identically, critics argue that by locking in taxpayers at 100 percent apportionment regardless of departure, it denies the ordinary privilege of putting oneself under a different state’s tax laws. This discourages migration by imposing all the costs of departure without the usual tax benefits, thereby penalizing the act of leaving, a concept prohibited by Crandall v. State of Nevada (1867).
Complexities and Constitutional Clashes: Family, Trusts, and Federal Obligations
The CBTA’s aggressive anti-avoidance provisions concerning family members and trusts introduce further constitutional infirmities. The measure retroactively taxes contributions to non-grantor trusts made after October 15, 2025, as if the assets remained with the billionaire. This date precedes even the public announcement of efforts to place a wealth tax on the ballot, making its retroactivity even more pronounced and legally dubious.
Crucially, the definition of "applicable trusts" includes any non-grantor trust, "whether or not such trust is a California resident," as long as a California billionaire or associated entity ever transferred property to it. This means California could tax a contributing billionaire on a trust’s assets even if the trust is administered in another state, with all beneficiaries and assets outside California, and no continuing relationship with the state. This assertion of taxing authority based solely on a historical contribution, without any present nexus, directly conflicts with Due Process under the U.S. Constitution, as highlighted in Safe Deposit & Trust Co. of Baltimore v. Virginia (1929) and Kaestner. Furthermore, a potential drafting error suggests the CBTA might capture the entire value of any trust to which assets are transferred in 2026, not just the transferred value, which would be unequivocally unconstitutional as it taxes assets never connected to the taxpayer.
Spousal aggregation provisions also raise serious constitutional questions. The measure attributes a non-resident spouse’s out-of-state wealth to a resident spouse, directly conflicting with Hoeper v. Tax Commission (1931), where the Court struck down a Wisconsin law taxing a husband on a wife’s separate income, stating that "any attempt by a state to measure the tax on one person’s property or income by reference to the property or income of another is contrary to due process." While taxation of community property for two resident spouses is generally permissible, the mandatory aggregation that reaches a nonresident spouse’s property, for which California lacks ownership or territorial nexus, is legally problematic. The internal consistency test is also failed here; if identical laws were in place in all 50 states, a couple with spouses domiciled in different states would pay 10 percent (5% from each state), while a couple domiciled together would pay 5 percent, representing a facial violation.
Divorce provisions add another layer of complexity. Debts to "related persons" incurred after October 15, 2025, are added back to net worth. If a divorce occurs, any indebtedness to an ex-spouse would be treated as if it never existed, with those assets still subject to tax, again raising due process concerns by taxing assets the taxpayer no longer owns.
Finally, federal law exempts federal obligations (like Treasury bills, notes, and bonds) from state taxation other than corporate franchise, estate, and inheritance taxes. The CBTA’s base includes no such exclusion and explicitly bars unauthorized exemptions. While this specific defect might lead to a court-ordered exclusion rather than invalidating the entire tax, it highlights a fundamental oversight and offers a clear avoidance channel for liquid assets.
The Specter of Excessive Fines: Valuation and Penalties
The CBTA places the responsibility of asset valuation squarely on the taxpayer, a task that is straightforward for publicly traded assets but exceptionally challenging for non-traded assets like private company stakes, especially given the tax’s unique valuation rules. For startups, valuation can be highly speculative, with good-faith estimates varying substantially.
The measure imposes severe penalties: up to 40 percent of the understatement of liability for taxpayers if the Franchise Tax Board (FTB) disagrees with a valuation. More remarkably, certified appraisers hired by taxpayers are subject to penalties of up to 4 percent of the understatement of tax, with no cap. For an appraiser, a 4 percent penalty on a multi-billion-dollar valuation could be financially ruinous. Federal law, for comparison, caps appraiser penalties at 125 percent of the fee received for the appraisal to ensure proportionality. The Supreme Court’s affirmation in Timbs v. Indiana (2019) that the Eighth Amendment’s Excessive Fines Clause applies to states, combined with the United States v. Bajakajian (1998) standard that a fine is excessive if grossly disproportionate to the offense, suggests these uncapped penalties for good-faith valuation efforts could be deemed unconstitutional.
Judicial Reformation: A Limited Lifeline?
The drafters’ express invitation for judicial reformation is unlikely to save the CBTA from its myriad constitutional flaws. While California courts, as outlined in Kopp v. Fair Political Practices Commission (1995), can reform a statute if they can confidently conclude it effectuates clearly articulated policy judgments and the enacting body would prefer reformation to invalidation, they have shown significant reluctance to apply this power to tax laws. Cases like Abbott Laboratories v. Franchise Tax Board (2009) and Ventas Finance I, LLC v. Franchise Tax Board (2008) exemplify this judicial restraint, particularly when reformation would require legislative line-drawing rather than a single, obvious cure.
The defects in the CBTA—from the retroactive residency date, to the 100 percent apportionment scheme, to the treatment of trusts and spousal aggregation—do not admit of easy reformation. Deciding which date replaces January 1, what apportionment system is adopted, or how trust and spousal provisions are revised are fundamentally legislative choices, not judicial ones. Courts cannot assume powers not delegated to them under the separation of powers doctrine. The sheer number and interconnectedness of the CBTA’s constitutional infirmities suggest that a measure judicially modified to address every challenge would be so drastically different from the one voters approved that comprehensive reformation would be deemed impossible.
Broader Implications and The Road Ahead
The California Billionaire Tax Act presents a high-stakes gamble for the Golden State. Even before its potential passage, the mere prospect of the measure is driving wealthy individuals and potential investors out of California, fostering a chilling effect on future startup founders who fear the precedent of a permanent wealth tax that might avoid some of these initial legal pitfalls. If the CBTA is ultimately struck down, California would find itself in "the worst of all worlds": having incurred significant economic damage through capital flight and a diminished reputation for business, facing years of costly litigation, and yet generating not a single dollar of new revenue.
The measure’s attempt to mandate an expedited judicial review in 2027, making its facial validity incontestable thereafter (except for as-applied challenges), is an astonishing overreach. It seeks to bind courts on issues like fair apportionment, which often require fact-specific analysis of individual cases, long before such cases can arise.
The numerous and profound constitutional deficiencies of the CBTA, from its questionable characterization as an excise tax and problematic retroactive provisions to its expansive reach, flawed apportionment, and potentially excessive penalties, suggest that it is more likely to be invalidated than reformed. The ongoing legal battles will be closely watched nationwide, potentially shaping the future of wealth taxation and state fiscal policy across the United States.
