California’s 2026 Billionaire Tax Act: What High-Net-Worth Taxpayers Need to Know

California’s 2026 Billionaire Tax Act (the “Act”) is a state-level ballot initiative that, if approved by voters in November 2026, would amend the California Constitution and impose a one-time excise tax on any individual – and “applicable trust” - with a worldwide net worth of $1 billion or more who was a California resident, or part-year resident, as of January 1, 2026. Under the Act, the tax would generally equal 5% of the taxpayer's net worth determined as of December 31, 2026.

The stated purpose of the Act is to protect access to high-quality, equitable health care, and to support funding for kindergarten through grade fourteen public education and food assistance programs. Of the revenue generated from the Act, 90% will be allocated to support health care funding, and 10% will support education-related and food assistance and tax compliance enforcement expenditures. 

Reportedly, the Act would apply to more than 200 Californians. However, it is likely that some of these taxpayers proactively left California or relocated their companies outside of California because of the proposal.

Net Worth Determination 

Under the Act, the amount of net worth subject to tax is measured as of December 31, 2026. “Net worth” is generally defined as the fair market value of all worldwide assets and property interests of a taxpayer and their spouse, subject to detailed inclusions and certain exclusions.

For interests in trust, a taxpayer’s net worth includes the net worth of any “grantor” trust of the taxpayer, as well as the value of any property held by any other trust (other than a tax-exempt trust) to which the taxpayer transferred assets in 2026, and 75% of the value of such property transferred in 2025. In general, a “grantor” trust is one for which the taxpayer is liable for the income tax attributable to the trust’s income and generally includes revocable trusts and certain forms of irrevocable trusts.

For business interests, publicly traded shares are valued at fair market value as of December 31, 2026, while private company share values are determined by examining the company’s book value, profits, and, if necessary, a certified appraisal.

Certain debts and liabilities reduce a taxpayer’s net worth. For example, full recourse debts reduce net worth dollar for dollar, but the Act restricts recognition of nonrecourse liabilities and liabilities that are economically offset by retained interests or correlated positions. Pledges to charities or philanthropic organizations reduce net worth only if they were legally enforceable and made before October 15, 2025. 

The following assets are excluded from the net worth calculation: interests in real property held directly by a taxpayer or via a revocable trust; tangible personal property located outside of California for at least 270 days during 2026; qualified pensions and retirement accounts (although Roth IRA assets above $10 million are included); and up to $5 million of certain other assets such as art and collectibles, non-publicly traded financial instruments, intellectual property rights, vehicles, and other personal property.

Net Worth Calculation Methods

California residents are generally taxed on all income from all sources, regardless of where the assets are located. Under the Act, the default “standard method” of apportionment requires a taxpayer to pay 100% of the tax regardless of residency history. However, an “alternative” apportionment method is available if the standard method “does not fairly represent the extent to which the taxpayer’s excessive wealth was accumulated in, or substantially sustained by, California.” Under the alternative method, the apportioned percentage cannot fall below 25%, unless required by federal or state law.

This suggests that a California resident who built a company out of state and recently moved to California will want to marshal evidence to support the situs of key value-creating activities and essential business infrastructure.

Planning Strategies to Reduce Net Worth 

For affected taxpayers that continued to be residents of California after December 31, 2025, there may still be time to consider planning opportunities as the net worth determination is not made until December 31, 2026. For example, taxpayers could think about lifetime gifting (outright), accelerating large charitable gifts (outright or to tax-exempt trusts), realizing capital gains, prepaying estimated taxes, restructuring certain real estate ownership so that the property is owned directly by the taxpayer rather than through an entity such as an LLC, and relocating tangible assets outside of California. Marital dissolution has even been suggested for those who are exceedingly tax averse. 

Residency Determination

Application of the excise tax depends on a taxpayer’s residency status as of January 1, 2026. Under the Act’s retroactivity provisions, if a taxpayer was a California resident as of that date, the tax is imposed regardless of the timing of any subsequent receipts of taxable income – for example, income generated from a liquidity event. Those seeking to avoid the tax must be able to establish that they were not a resident of California as of January 1, 2026.

The Act uses California’s existing residency framework to determine who falls within its scope. A taxpayer’s residency status is determined by facts and circumstances, underpinned by the theory that a taxpayer is a resident of the place where they have the closest connections[1]. Relevant factors include the location of principal residence, the amount of time spent in California versus outside of California, and the location of family and social ties.

To establish a change of residency prior to January 1, 2026, a taxpayer should be prepared to prove that: (1) they have abandoned their prior California domicile; (2) they have physically moved to and are residing in the new locality; and (3) they intend to remain in the new location permanently or indefinitely, as demonstrated by their actions.

For many, the window to change residency status and establish the necessary contacts in a new location has closed, unless the change was made before January 1, 2026.

The Act’s Severability Clause May Offer Opportunity for Relief

Relief may still be available for certain taxpayers who terminate California residency during 2026. Under the Act’s severability clause, if any provision of the Act, such as its retroactive provisions, is found to be unconstitutional (more on this below), the other provisions would remain in effect. Consequently, terminating California residency after January 1, 2026, but before the Act’s ratification, could result in avoidance of the tax. 

Section 50311 of the Act provides that the court “must preserve the imposition of the tax authorized, including by reforming dates or periods specified, using the most limited adjustments possible to cure any constitutional or other legal defect, while allowing the remaining provisions to operate.” In reforming any dates in the Act, a court shall “preserve the imposition of the tax for the 2026 tax year, or if that is not permissible then for 2027 or the earliest permissible subsequent year. . .” 

This “flee and fight” type strategy involves significant personal upheaval and is not without risk and significant personal economic costs, as the Act’s retroactive provisions may prevail over constitutional challenges.

Challenges to the Act

If enacted, the Act is anticipated to face a myriad of challenges on federal and state constitutional grounds, including violation of the Dormant Commerce Clause of the United States Constitution, as well as the Due Process Clauses (retroactivity), Equal Protection Clauses, and Takings Clauses of the United States and California Constitutions.

A federal bill, the Keep Jobs in California Act, H.B. 7619, was recently introduced and aims to block the retroactive tax. The bill would prohibit any state from imposing a tax on a nonresident individual’s assets for any period before the tax was enacted if the individual no longer resides in that state.[2]

In addition to federal legislation, two opposing state “poison pill” initiatives, Propositions 41 (prohibiting new state taxes that are excluded from existing voter-approved state spending limits) and 42 (prohibiting new state personal property taxes and certain retroactive state taxes), have recently qualified for the November ballot. Under the California Constitution, the measure receiving the most votes will prevail.

For more information about California’s 2026 Billionaire Tax Act, please contact any member of the Farella Braun + Martel Family Wealth Group.