Candice Horbacz
The California Billionaire Tax Act (CBTA), slated for the November 3, 2026, ballot as Proposition 40, is poised to trigger a wave of legal battles, with legal experts warning that the only clear beneficiaries of its adoption would be attorneys. This ambitious measure, designed to impose a one-time 5 percent tax on the net worth of billionaires, is riddled with fundamental constitutional vulnerabilities that could lead to its invalidation, costly litigation, and significant economic repercussions without generating a single dollar of new revenue. Critics argue that the tax is not merely economically damaging but also legally dubious on multiple fronts, ranging from its foundational characterization to its expansive reach across state lines and its retroactive provisions.
Background: California’s Pursuit of Wealth-Based Taxation
California, known for its progressive tax policies and innovative economy, has long grappled with significant wealth disparities and the perpetual need for robust public funding. In recent years, discussions around taxing extreme wealth have gained traction, fueled by proponents who argue that a wealth tax is a necessary mechanism to address inequality and generate substantial revenue for critical state services, education, and infrastructure projects. The CBTA represents a concrete effort to implement such a policy, targeting the state’s wealthiest residents. However, the path to implementation is fraught with legal obstacles, as the measure’s drafters themselves anticipated intense legal scrutiny, embedding preemptive legal defenses into its design. These defensive provisions, however, are seen by many as an implicit acknowledgment of the tax’s inherent legal vulnerabilities rather than an impenetrable shield.
The Legal Onslaught: A Deeper Dive into Constitutional Hurdles
A recent analysis by the Tax Foundation highlights the severe constitutional flaws embedded within Proposition 40, suggesting that these deficiencies could, and should, lead to the tax being struck down by courts.
1. Excise Tax or Property Tax? A Definitional Battle
At the heart of the CBTA’s legal fragility lies its attempt to define the wealth tax as an "excise tax" on the "activity" of "sustaining excessive accumulations of wealth." This characterization is a deliberate maneuver, as California’s state constitution imposes strict limits on property taxation, including a 0.4 percent cap on the taxation of intangibles and a requirement for uniform taxation of property. If the tax were correctly identified as a property tax, it would undeniably conflict with these existing constitutional provisions, including the long-standing Proposition 13 assessment limits.
However, both California and federal courts have consistently held that the true nature of a tax is determined by its substance, not by the label arbitrarily assigned to it. Merely calling it an excise tax does not alter its fundamental character. Legal precedents, such as Ingels v. Riley (1936) and Weekes v. City of Oakland (1978), reinforce the maxim that "the law respects form less than substance." The CBTA, in its essence, is a tax on both tangible and intangible property, with liability triggered by ownership on a fixed date, measured against net worth, and imposed without any transaction, transfer, or realization event. "Sustaining" wealth is, in practical terms, indistinguishable from ownership.
Recognizing this conflict, the measure’s drafters embedded a constitutional amendment within Proposition 40, seeking to authorize this specific one-time tax notwithstanding any other conflicting provisions of the constitution. This move itself faces legal challenges, as ballot measures are permitted to "amend" but not "revise" the constitution – a distinction tied to the scope and fundamental nature of the proposed changes. Critics argue that such broad constitutional alterations constitute an impermissible revision, which, if upheld by courts, would subject the wealth tax to existing property tax limitations and likely invalidate it. Furthermore, the amendments could violate the "single subject rule" for ballot initiatives, leading to the same outcome. The attempt to reclassify the tax could also backfire in federal constitutional litigation, strengthening arguments that it is a "wholly new tax," complicating issues of retroactivity and apportionment.
2. Retroactivity: Taxing the Past is Fatally Flawed
The CBTA introduces a critical retroactivity problem: it imposes a one-time 5 percent tax on the net worth of billionaires who resided in California as of January 1, 2026, based on wealth measured on December 31, 2026. Given that Proposition 40 will appear on the November 2026 ballot, its residency "snapshot" date predates the potential adoption of the tax by more than ten months.
While some retroactive tax modifications have survived legal scrutiny, the U.S. Supreme Court has drawn a clear distinction between "modest revisions" of existing taxes and the adoption 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. The CBTA, being a novel wealth tax, falls squarely into the "wholly new tax" category, making its retroactive application highly vulnerable.
The measure’s drafters attempted to build in a "safety valve" by explicitly requesting courts to engage in "judicial reformation" to set later dates if the chosen dates are deemed unconstitutional. However, California courts have historically been reluctant to reform tax laws, fearing such actions would constitute judicial policymaking and an encroachment on the legislative function, violating the separation of powers doctrine, as articulated in cases like Ventas Finance I, LLC v. Franchise Tax Board (2008). The drafters’ emphasis on a "lock-in" residency provision, aimed at preventing wealthy individuals from leaving the state to avoid the tax, further complicates judicial intervention. If courts determine that the CBTA impermissibly imposes a wholly new tax retroactively, they may have no choice but to strike down the entire tax rather than attempt to salvage it by establishing new, post-enactment assessment and valuation dates.
Timeline of Retroactive Provisions:
- October 15, 2025: Retroactive date for contributions to non-grantor trusts and debts to related persons, aimed at preventing pre-ballot avoidance.
- January 1, 2026: Residency snapshot date. Individuals domiciled in California on this date are subject to the tax.
- December 31, 2026: Wealth measurement date. The tax is assessed on net worth as of this date.
- November 2026: Proposition 40 appears on the ballot for voter approval.
- 2027: The measure mandates an expedited judicial review to determine its facial validity.
3. Nexus and Apportionment: Overreach Beyond State Borders
States are permitted to tax their residents’ worldwide assets, but due process demands a "definite link" or "minimum connection" between the state and the person, property, or transaction it seeks to tax, a connection that must exist when the interest is being taxed (Miller Bros. Co. v. Maryland, 1954; North Carolina Department of Revenue v. Kimberley Rice Kaestner 1992 Family Trust, 2019). The CBTA’s design explicitly taxes former residents—billionaires who left the state earlier in 2026—based on their wealth as of December 31, 2026. This means the tax would fall on individuals no longer domiciled in California, on their entire net worth rather than a prorated share, and based on a post-departure valuation that could include wealth acquired or accrued in another state.
The legal maxim mobilia sequuntur personam (movables follow the person) is directly contradicted. For a mid-year mover, neither the person nor their property may have any link to California by the December 31 valuation date. Proponents argue the obligation attaches while still a resident, but this is inconsistent with the constitutional power to tax, which is based on contemporaneous protection and benefits.
The proposed tax also runs afoul of the Commerce Clause, specifically the Complete Auto Transit, Inc. v. Brady (1977) test, which requires a tax to demonstrate: (1) substantial nexus, (2) fair apportionment, (3) nondiscrimination, and (4) a fair relationship between the tax and state services. The CBTA’s "100 percent apportionment method" (which is essentially unapportionment) for residents as of January 1, 2026, regardless of where wealth was generated or how long they resided in the state, fails these tests. The measure explicitly states "without reduction or multiplier based on residency history."
The "internal consistency" requirement of the Commerce Clause, which asks if every state adopting an identical tax regime would result in double taxation or greater burdens on interstate movers, is also violated. While drafters offer credits for wealth taxes paid to other states, these credits are based on days of residence, incompatible with California’s 100% unapportioned tax. If a person’s California domicile ends on January 2 but they are still taxed on 100% of their wealth at year-end, and a new state with an identical tax also claims them, double taxation is inevitable. This is especially true for Optional Deferral Accounts (ODAs), where California would tax subsequent appreciation of illiquid assets even after a taxpayer leaves the state, potentially leading to multiple states taxing the same appreciating wealth. This could push the levy from a tax to a "confiscation of property" (Brushaber v. Union Pacific Railroad Co., 1916).
Furthermore, the CBTA fails the "external consistency" test (Oklahoma Tax Commission v. Jefferson Lines, Inc., 1995) by attributing 100 percent of wealth to California without reflecting the in-state component of the taxable event. While the measure allows for "as-applied challenges" to reduce apportionment, it sets an unconstitutional 25 percent floor, even when a taxpayer can demonstrate by clear and convincing evidence that a lesser amount is required. This impermissibly shifts the state’s burden of ensuring fair apportionment onto the taxpayer and mandates taxation in excess of fair apportionment.
4. Family, Trusts, and the Specter of Multiple Taxation
The CBTA’s aggressive anti-avoidance provisions concerning transfers to spouses, children, or trusts introduce further constitutional infirmities. The measure retroactively taxes any contribution to a non-grantor trust made after October 15, 2025, as if the assets remained with the billionaire. This date precedes the public announcement of efforts to place a wealth tax on the ballot, making it even more problematic from a retroactivity standpoint.
Crucially, the CBTA appears to capture the entire value of any trust to which assets are transferred in 2026, not just the value of the transfer itself. This provision is seen as "clearly unconstitutional," as it taxes assets that may have never had any connection to the taxpayer. Even if narrowly interpreted, Supreme Court rulings like Safe Deposit & Trust Co. of Baltimore v. Virginia (1929) and Kimberley Rice Kaestner (2019) confirm that out-of-state trusts, even with in-state beneficiaries, cannot be taxed without sufficient nexus. The CBTA attempts to tax trusts with no remaining ties to California, violating U.S. Due Process.
The measure also unconstitutionally attributes a non-resident spouse’s out-of-state wealth to a resident spouse. This directly conflicts with Hoeper v. Tax Commission of Wisconsin (1931), where the Supreme Court struck down a law taxing a husband on his 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." This mandatory aggregation, distinct from elective joint filing, reaches property for which California lacks ownership or territorial nexus.
This spousal aggregation also leads to a facial violation of the internal consistency test. If identical laws were adopted nationwide, a couple domiciled in different states would pay 10 percent (5% from each state taxing the entire combined wealth), while a couple domiciled together would pay 5 percent. The offered credits are insufficient as they are based on individual residency days, not spousal status or joint wealth. Similar multi-taxation issues arise with jointly funded trusts in third states.
Finally, the measure’s treatment of debts to related persons, incurred after October 15, 2025, which are added back to net worth, creates issues for divorce settlements. If a divorce occurs, any indebtedness to an ex-spouse would be disregarded, potentially taxing assets the taxpayer no longer owns, with clear due process implications.
5. Right to Travel Implications: Penalizing Departure
The U.S. Constitution confers a fundamental right to travel, meaning any law penalizing its exercise is subject to strict scrutiny (Shapiro v. Thompson, 1969; Saenz v. Roe, 1999). Critics argue that the CBTA, with its lock-in residency and 100 percent apportionment whether one leaves or stays, denies an ordinary privilege of departure: the ability to put oneself under a different state’s laws, including its tax code. Taxpayers would incur all the costs of moving without any of the ordinary tax benefits, effectively discouraging migration. If courts find this infringes on the right to travel, proponents would need to demonstrate a compelling governmental interest, and simply maximizing revenue or preventing tax-induced migration would likely not suffice. The fact that the tax applies even if January 1 was the only day of residency in California creates a burden on those exercising the right to leave, echoing concerns from Crandall v. State of Nevada (1867), which prohibited a tax on the act of leaving.
6. Illegal Taxation of Federal Obligations
Federal law explicitly exempts federal obligations, such as U.S. Treasury bills, notes, and bonds, from state taxation, except for specific corporate franchise, estate, and inheritance taxes (31 U.S.C. § 3124(a)). The CBTA, in its current form, includes no such exclusion in its tax base and explicitly bars any exemption not expressly authorized. While this particular defect would likely lead to a court-ordered exclusion rather than invalidating the entire tax, it presents a clear legal flaw and offers a potential avoidance channel for affected billionaires who could convert liquid assets into federal instruments by the December 31 valuation date.
7. High, Potentially Excessive Fines
The CBTA places the onus of asset valuation on taxpayers, which is particularly challenging for non-traded assets like startups, where good-faith estimates can vary widely. If the Franchise Tax Board (FTB) disputes a taxpayer’s valuation, penalties can reach up to 40 percent of the understatement of liability. More significantly, certified appraisers hired by taxpayers face penalties of up to 4 percent of the tax understatement. For an appraiser dealing with a billionaire’s private company, a 4 percent penalty could be ruinous, far exceeding their fee.
Federal law caps appraiser penalties at 125 percent of the appraisal fee to ensure proportionality (26 U.S.C. § 6695A(b)). The CBTA has no such cap, exposing appraisers to potentially enormous fines. Given the Supreme Court’s affirmation in Timbs v. Indiana (2019) that the Eighth Amendment’s Excessive Fines Clause applies to states, and the standard from United States v. Bajakajian (1998) that a fine is unconstitutionally excessive if "grossly disproportionate to the gravity of the offense," these penalties are highly vulnerable to challenge.
Judicial Reformation: A Slim Hope for the CBTA
The sheer number and complexity of these constitutional defects make judicial reformation—the partial rewriting of statutes to render them constitutional—an unlikely savior for the CBTA. While California courts have some capacity for reformation, guided by principles laid out in Kopp v. Fair Political Practices Commission (1995), they are highly reluctant to apply it to tax laws. As seen in cases like Abbott Laboratories v. Franchise Tax Board (2009) and Ceridian Corp. v. Franchise Tax Board (2000), courts typically refuse to redraft statutes when doing so requires legislative line-drawing.
For instance, while a court might order the exclusion of federal obligations (a single, obvious cure), it would be an exercise of legislative, not judicial, power to choose new residency dates, design a new apportionment system, or revise the treatment of trusts and spousal aggregation. The drafters’ explicit invitation for judicial reformation of residency dates is likely insufficient, as courts cannot assume powers not vested in them under the separation of powers doctrine. A measure modified to address every constitutional challenge would be drastically different from the one submitted to voters, undermining the democratic process.
Economic Implications and Stakeholder Reactions
The impending ballot measure is already having a tangible effect, reportedly driving some high-net-worth individuals out of California. Should Proposition 40 pass, this exodus could accelerate, coupled with a chilling effect on future startup founders and investors, who may fear California adopting a permanent wealth tax in the future, even if this specific one fails. The state could face a "worst of all worlds" scenario: a significant threat that deters investment and talent, years of costly and complex litigation that diverts resources, and ultimately, no new revenue if the tax is invalidated.
Proponents of the CBTA emphasize the potential for substantial revenue generation—estimated in the billions—to fund essential public services, framing it as a matter of fairness and economic justice. They argue that the state needs to ensure that its wealthiest residents contribute their fair share, especially given the state’s ongoing fiscal needs. However, opponents, including various business groups, taxpayer advocates, and legal experts, counter that the legal flaws are too profound to overcome, and the economic disincentives too high. They warn that the tax could harm California’s competitive edge, discourage innovation, and ultimately prove counterproductive by diminishing the state’s tax base through out-migration.
Conclusion
The California Billionaire Tax Act (Proposition 40) stands as a monument to legislative ambition colliding with constitutional reality. From its dubious characterization as an excise tax to its problematic retroactive clauses, overreaching apportionment methods, and legally flawed provisions for families and trusts, the measure faces a barrage of legal challenges. The explicit denial of exemptions for federal obligations and the imposition of potentially excessive fines further underscore its vulnerabilities. While the state may argue for severability or judicial reformation, the interconnectedness and fundamental nature of these defects suggest that courts may have little choice but to strike down the tax in its entirety. The prospect of years of litigation, coupled with the immediate and long-term economic flight of wealth and talent, presents a significant risk for California, potentially leaving the state with substantial legal bills and a diminished economic landscape, all without realizing its ambitious revenue goals.
