California’s Proposed Billionaire Tax Sparks Concerns
California is looking to implement a tax targeting millionaires, which, according to tax experts, poses significant hurdles for those wishing to leave the state without incurring costs.
The Billionaire Tax Act, which may appear on the upcoming general election ballot, aims to introduce a one-time 5% tax on total assets for taxpayers in California with a net worth of at least $1 billion. Typically, new taxes start after being approved. However, this proposed tax would be effective retroactively from January 1, 2026. This means the estimated 200 to 250 millionaires in California had little time to adjust their residency after first learning about the tax last December.
Christopher Manes of Manes Law pointed out, “If they had set the date in November, it might have allowed many individuals to leave and, perhaps, save millions.”
Recently, tech billionaire Peter Thiel revealed he has established a significant presence in Miami over the last few years, claiming to have a private residence there since 2020 and an office for his venture capital firm since 2021. Others, also unnamed, seem to be exploring similar moves.
Interestingly, Jensen Huang, CEO of NVIDIA, has expressed indifference toward the proposed tax, stating, “We chose to live in Silicon Valley, and whatever taxes they impose, so be it. I’m totally fine with that.”
The United Health Care Workers West, the union backing this bill, argues that the proposed start date seeks to prevent billionaires from escaping tax liabilities by relocating their assets or claiming residency in another state. They estimate the tax could generate around $100 billion, aimed at offsetting healthcare cuts and ensuring wealthier residents contribute fairly.
Nonetheless, legal challenges to the aggressive timeline are expected. This situation raises questions among tech founders and investors in California about how to plan a swift move to a state with lower taxes before significant financial transactions occur. Despite the potential tax proposal, California has been a magnet for wealth creation, particularly with the rise of artificial intelligence, leading to an influx of new billionaires.
Understanding California’s tax residency rules can be complex. Unlike New York, which focuses on “place of residence” and days spent in the state, California employs a “nearest connection test.” Manes elaborated that this test gauges a taxpayer’s connections to both California and their new home using various metrics—like family ties, employment, and where assets are located.
Taxpayers looking to change their residency for tax purposes must take concrete steps—like moving to a new home—before a taxable event occurs. “Intention is key,” Manes noted, stressing that one needs to clearly demonstrate the desire to leave California permanently.
Legal experts believe evading the proposed wealth tax will be quite challenging, as establishing a new residency typically won’t happen overnight. “The ship has ostensibly sailed,” Manes added.
Yet, there is uncertainty about whether voters will actually support this measure. California’s history with tax increases on ballots isn’t always favorable, and Governor Gavin Newsom is actively working against the bill.
The retroactive aspect of the tax could open doors for litigation. Beyond questioning its constitutionality, individuals who tried to opt out prior to November might argue that such a retroactive approach breaches their rights to due process. While the Supreme Court has allowed some retroactive taxes for valid legislative reasons, creating an entirely new tax is less likely to receive approval.
Lawyers, such as John Feldhammer from Baker Botts, predict that the most substantial legal challenges may arise from people who had already left their jobs before the tax’s potential passage. Some wealthy Californians are even considering leaving the state before the January deadline, aiming to solidify their plans before the impending vote.
Billionaires typically have extensive legal and logistical teams, allowing for a swift transition to new residences. They often own properties in various locations, granting them flexibility in residence changes, as Feldhammer emphasized, “We’re talking about the most portable class in America. They have the means and ability to move very quickly.”
