California's Proposed Billionaire Tax: How a 5% Wealth Levy Fits Into the Nation's Steepest Income Tax Brackets

As California’s leaders prepare for a November 2026 voter referendum on a controversial wealth tax, a critical question emerges: what does a one-time 5% levy on billionaires’ net assets mean for a state already burdened by some of the nation’s most aggressive income tax brackets? The proposal, estimated to raise approximately $100 billion from over 200 California billionaires, has ignited fierce debate about wealth inequality, tax competitiveness, and the state’s economic future—particularly as it sits atop an income tax system that already ranks among America’s most progressive.

What the Proposed Wealth Tax Actually Covers—And How It Differs From Income Tax Brackets

The 2026 Billionaire Tax Act targets a strikingly broad asset base compared to traditional income tax brackets. Rather than taxing earnings or investment returns, the law would impose a one-time levy on December 31, 2026 valuations of billionaires’ total wealth. This includes equity in privately-held companies, publicly-traded stocks, personal assets exceeding $5 million, and retirement accounts over $10 million. The only major exemption involves directly-held real estate within revocable trusts—a deliberate carve-out designed to avoid conflict with California’s 1978 Proposition 13, which capped property taxes at 1% of assessed value.

To contextualize this proposal within California’s existing tax environment: the state’s individual income tax brackets already reach 13.3% for top earners, making California one of the nation’s highest-taxing states. This rate includes a 1% additional surtax on income exceeding $1 million (approved in 2004) and even steeper brackets for those earning above $250,000 (or couples exceeding $500,000), introduced in 2012 and extended through 2030. The billionaire tax would essentially operate on a parallel track—targeting accumulated wealth rather than annual income flows.

The Revenue Question: Will $100 Billion Justify Further Taxation?

Four scholars instrumental in drafting the proposal—including tax law professors and UC Berkeley economist Emmanuel Seth—project that the wealth levy would generate approximately $100 billion, dispersed across California’s budget between 2027 and 2031. According to their analysis, this figure draws from Forbes’ billionaire wealth valuations and assumes compliance from all qualifying residents.

However, skepticism runs deep. The California Legislative Analyst Office (LAO), a nonpartisan fiscal watchdog, estimates the proposal could ultimately cost the state hundreds of millions in annual personal income tax revenue—potentially offsetting the projected windfall. This creates an uncomfortable paradox: California’s top 2% earners currently generate roughly half the state’s individual income tax revenue, yet billionaires contribute only about 2.5% of total personal income tax receipts. The discrepancy exists because the ultra-wealthy utilize sophisticated tax avoidance strategies unavailable to high-income professionals (doctors, lawyers, corporate executives) within the state’s income tax brackets. Many billionaires maintain luxury lifestyles by pledging stock holdings as loan collateral rather than selling shares, thereby avoiding capital gains tax triggers altogether.

How the Billionaire Tax Compounds With Existing Income Tax Brackets

The interaction between this wealth tax and California’s progressive income tax system creates compounding pressures. Suppose a billionaire forced to satisfy the wealth tax must liquidate holdings to generate cash. Any resulting capital gains would face California’s combined state and federal tax rate of approximately 37.1%—a brutal combination that would require selling additional shares just to cover the tax liability itself. This cascading math explains why some wealthy residents are reportedly exploring relocation strategies before key January 1, 2026 residency deadline approaches.

Meanwhile, Governor Gavin Newsom and business groups warn that such aggressive taxation—stacked atop the nation’s highest income tax brackets—risks triggering an exodus of entrepreneurs and corporations. They argue this would undermine long-term economic recovery powered by the artificial intelligence sector. Proposal drafters counter that such fears are overstated, with economist David Gamage dismissing relocation concerns as “alarmist” with “no real basis in reality.”

The Residency and Constitutional Battleground

The proposal explicitly addresses tax evasion through relocation—a significant concern given recent moves by high-profile billionaires. Google co-founder Larry Page purchased two Miami properties in late 2025 for $173.5 million, with affiliated companies relocating simultaneously. However, California’s tax authorities have historically fought such relocations aggressively.

A telling precedent emerged when the California Office of Tax Appeals ruled that Canadian comedian Russell Peters—who claimed Nevada residency, held Nevada business registrations, and maintained a Canadian address—remained a California tax resident for 2012-2014. The court examined his property holdings, family ties, and credit card statements proving more days spent in California than any other state. Similarly, in the 2021 Bracamonte case, a couple attempting to escape California taxes on a $17 million business sale lost their challenge.

Tax attorney Shail P. Shah points out that California’s residency determinations are “entirely subjective,” requiring judges to assess whether someone truly intends permanent departure. For decades-long Silicon Valley residents with deep professional networks and personal roots, severing California ties proves nearly impossible—legally speaking.

Yet tax lawyer Jon D. Feldhammer reports that multiple billionaires consulting his firm are seriously contemplating relocation, including moving their businesses. His analysis identified eight potential constitutional challenges to the proposal itself, one of which centers on retroactivity: applying the tax to anyone deemed a California resident on January 1, 2026, even if they relocate before the November vote. While the U.S. Supreme Court has permitted retroactive federal income tax amendments, Feldhammer suggests the current Court may reject retroactive wealth taxes, advising clients to “relocate before the vote, the earlier the better.”

Asset Valuation: The Enforcement Nightmare

Beyond constitutional hurdles lies implementation complexity. The proposal mandates specific asset valuation methodologies to prevent underestimation. Unlisted company equity defaults to “book value plus annual book profit multiplied by 7.5,” with valuations capped no lower than prior financing rounds. Artwork and jewelry cannot be valued below insurance amounts. Charitable donations reduce taxable assets, but only through binding agreements executed before October 15, 2025—a deadline already passed.

Real estate purchased in 2026 cannot claim the Proposition 13 exemption if deemed tax-motivated acquisitions. Taxpayers facing valuation disputes may submit appraisals for review, but the burden of proof lies squarely with the wealthy residents challenging state determinations.

For billionaires holding illiquid private equity stakes—common among startup founders—the law permits installment payments over five years with interest charges, or selective deferral accounts delaying taxes until equity liquidation. These provisions simultaneously offer flexibility and create extended liability uncertainty.

The Broader Constitutional and Procedural Challenge

To reach a November 2026 voter ballot, the proposal must first be certified by state officials and collect 875,000 valid voter signatures by end of June 2026. Even passage guarantees litigation from affected taxpayers. PwC analysis warns that fierce legal challenges will undoubtedly follow any voter approval.

The proposal’s authors have attempted defensive architecture through constitutional amendments, arguing that wealth taxes on state residents long enjoyed constitutional status—only federal wealth taxes face constitutional prohibition. Four scholars wrote that billionaires “have more ways to avoid their wealth being considered taxable income,” making a direct wealth tax justified to “correct this injustice.”

California’s Tax Bracket Escalation in National Context

California’s billionaire tax doesn’t emerge in isolation. New York City’s newly elected Mayor Zohran Mamdani, who won office despite heavy billionaire-funded opposition, campaigned on raising the city income tax rate to 5.9% on incomes exceeding $1 million—when combined with state income tax, creating a stunning 16.8% combined rate. New York State already imposes 10.9% on top earners, making NYC’s trajectory a harbinger of intensifying wealth taxation nationwide.

The parallel movements suggest a broader ideological shift: if billionaires pay minimal effective rates despite California’s 13.3% income tax brackets and New York’s escalating rates, should states simply eliminate the middle-step of income taxation and directly tax accumulated assets instead?

The Path Forward: Economic Recovery Versus Wealth Redistribution

Tax attorney Shah expresses concern that the proposal’s mere existence—regardless of passage—sends a chilling signal to tech entrepreneurs amid pandemic recovery. The AI sector’s current momentum provides critical Bay Area growth; perception of hostile tax policy could undermine that fragile momentum. Feldhammer sketches a darker scenario: a founder becomes a “paper billionaire” through equity valuations by year-end 2026, yet faces wealth tax liability on non-existent cash. When forced to sell shares paying combined 37.1% capital gains tax, the founder dilutes equity ownership while achieving negative net proceeds.

The November 2026 referendum will ultimately decide whether California’s voters—who historically approve wealth taxes but also passed Proposition 13’s property tax restrictions—will authorize yet another lever atop the nation’s steepest income tax brackets. For billionaires, the calculation is brutally simple: California’s combination of 13.3% income taxes, aggressive residency rules, and now potential wealth taxation creates unprecedented pressure. For the state, the gamble is equally stark: can $100 billion in wealth tax revenue offset the jobs and tax base lost to relocation?

As California prepares for this defining fiscal vote, the question transcends simple revenue mathematics. It asks whether income tax brackets alone—no matter how progressive—adequately address wealth inequality in an era when ultra-wealthy residents engineer tax avoidance through sophisticated mechanisms rather than traditional earnings structures.