<![CDATA[Proposition 40 - Kugelman Law]]> https://www.kugelmanlaw.com/blog/tags/proposition-40/ Tue, 15 Sep 2026 17:42:47 GMT en-us <![CDATA[California Billionaire Tax: What Proposition 40 Means for You]]> https://www.kugelmanlaw.com/blog/california-billionaire-tax-proposition-40/ https://www.kugelmanlaw.com/blog/california-billionaire-tax-proposition-40/ Tue, 22 Sep 2026 17:25:19 GMT The California billionaire tax, Proposition 40 on the November 3, 2026 ballot, proposes a one-time 5% tax on the net worth of state residents worth $1 billion or more. As written, it would reach only a few hundred people. Its real significance for the broader high-net-worth community is what it signals: California is sharpening its…

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What is the California billionaire tax?

Proposition 40, formally the 2026 Billionaire Tax Act, qualified for the November 2026 ballot after supporters gathered roughly 980,000 signatures. If voters approve it, it would impose a one-time wealth tax of 5% on the net worth of California residents, and certain trusts, with a net worth of at least $1 billion. Proponents estimate the measure would affect roughly 200 taxpayers and raise funds directed toward Medi-Cal, food assistance, and public education. Two dates drive the measure. Residency is measured as of January 1, 2026, and net worth is valued as of December 31, 2026. In other words, whether you are subject to the tax turns on your residency at the start of 2026, and the amount turns on what you are worth at the end of it. This is a proposed law, not an enacted one. Voters decide on November 3, 2026, and the analysis below describes the measure as written.

How the California wealth tax would be calculated

Rate and threshold

The headline rate is 5%. The measure sets $1 billion as the entry point, with the full rate phasing in just above it, so the effective rate near the threshold is far lower than 5% and climbs to the full rate around $1.1 billion. The precise phase-in math matters at the margins and is one of several drafting details that opponents argue could push the effective burden higher than the headline number suggests.

What counts toward net worth

The tax base is broad. It reaches nearly all personal and financial wealth, including publicly traded securities, private equity and carried interests, cash, cryptocurrency, and intellectual property. Directly held real property is excluded, but interests in entities that own real estate remain in scope, which limits the value of simply holding real estate directly.

Valuing private business interests

For interests that do not trade publicly, the measure supplies a default valuation formula: fair market value equal to GAAP book value plus 7.5 times average annual book profits over three years, multiplied by the ownership percentage. Control presumptions can increase attributed value where voting rights exceed economic share. A taxpayer can override the formula with a certified appraisal, which is why documentation and professional valuation would be central to any billionaire tax dispute.

Trusts

The measure also reaches “applicable trusts,” generally non-grantor trusts that received assets from a California resident who had $1 billion or more in net worth as of January 1, 2026. That design is meant to limit the use of trusts to sidestep the tax.

Paying the tax

The measure allows the tax to be paid up front or spread over five years, with deferral charges. Supporters describe it as temporary. Skeptics question whether a tax like this, once in place, is ever truly allowed to expire.

Can you avoid the billionaire tax by leaving California?

This is the question we hear most, and the answer is more complicated than a moving truck. As written, the measure keys liability to residency on January 1, 2026, and does not appear to contain an explicit exit or trailing-tax provision for people who leave later in the year. On its face, that suggests residency at the start of 2026 is what controls. The catch is that residency itself is contested territory, and the measure’s residency provisions are widely viewed as vulnerable to legal challenge. Whether someone was truly a California resident on a given date is exactly the kind of fact the Franchise Tax Board (FTB) audits aggressively, and it turns on substantive life changes rather than the date on a driver’s license. Reporting has noted that several billionaires left California ahead of the 2026 deadline. Expect the state to scrutinize those departures closely. For most high-net-worth Californians, the practical lesson is not about the billionaire tax at all. It is that leaving California does not end California tax exposure. The FTB can examine your residency and your California-source income for years after you move. We cover that in detail in California Residency Audits and the Billionaire Tax and in Moving Out of California Without Triggering an FTB Audit.

What Prop 40 means if you are wealthy but not a billionaire

Only a small number of taxpayers would owe the billionaire tax itself. Yet the measure matters to a much wider group of high earners and high-net-worth families, for three reasons. First, it reflects and reinforces an enforcement climate. When the state pursues its wealthiest residents this openly, residency audits and valuation disputes tend to intensify across the board, reaching centi-millionaires and successful business owners, not just billionaires. Second, the debate raises the profile of California-source income, equity compensation, and business-sale planning, all areas where people who move still owe California tax on the right facts. We address those in California Source Income After You Move. Third, it is a reminder that residency planning done casually, or at the last minute, invites exactly the audit you were trying to avoid. Even if voters approve Proposition 40, passage would likely be the beginning of the fight rather than the end. Opponents have already questioned the measure’s constitutionality, and analysts expect serious litigation over who may be taxed, on what, and to what degree, with the residency provisions among the most exposed. A measure that survives the ballot could spend years in court before anyone writes a check. For a taxpayer, that uncertainty cuts both ways. It means you should not assume the tax will take effect exactly as written, and it means you should not assume you can ignore it. The prudent path is to understand your position now and to be ready to document it.

How to protect yourself now

Whether or not Proposition 40 passes, the same fundamentals protect high-net-worth Californians. Treat residency as a matter of substance, not paperwork, and be able to show where your life actually centers. Keep clear records supporting the value of private business interests, since valuation is where these disputes are won or lost. Coordinate any move with your income tax, equity compensation, and business-sale timing rather than handling them separately. And if the FTB opens a residency inquiry, involve counsel before you respond, because early answers shape the entire audit. Our results reflect what disciplined advocacy achieves in high-stakes tax disputes. In one federal matter, two IRS Notices of Deficiency proposing more than $557,000 across six years were settled in U.S. Tax Court down to roughly $38,000, and with avoided interest and California exposure the client effectively saved over $1.2 million. Results depend on specific facts. Past results do not guarantee future outcomes.

Talk to a California tax attorney about the billionaire tax

If you have substantial wealth in California, are planning a move, or are already facing FTB scrutiny, get ahead of it. Kugelman Law represents high-net-worth individuals and business owners in California residency audits, tax audits, U.S. Tax Court litigation, and complex tax matters across California and nationwide. See our Los Angeles tax attorney page for how we help Southern California clients. Schedule a paid, privileged consultation by calling (949) 835-0440 or visiting our contact page.

Frequently asked questions

Who has to pay the California billionaire tax?

As proposed, Proposition 40 applies to California residents, and certain trusts, with a net worth of at least $1 billion, measured by residency on January 1, 2026 and net worth on December 31, 2026. Proponents estimate roughly 200 taxpayers would be affected.

Is the billionaire tax a one-time tax or an annual tax?

The measure is written as a one-time 5% wealth tax, payable up front or over five years with deferral charges. Supporters call it temporary. Critics question whether it would truly expire. It is proposed law and would take effect only if voters approve it on November 3, 2026.

Can I avoid the tax by moving out of California?

The measure ties liability to residency on January 1, 2026 and does not appear to include an explicit exit tax for later departures. However, residency is heavily contested and closely audited by the FTB, and leaving California does not end California tax exposure generally. Anyone relying on a move should expect residency scrutiny.

Does the billionaire tax apply to cryptocurrency and private business interests?

Yes, as written. The tax base includes nearly all financial wealth, including cryptocurrency, publicly traded securities, private equity, carried interests, and intellectual property. Private business interests are valued under a default formula unless a certified appraisal is provided.

When do Californians vote on Proposition 40?

The measure is on the November 3, 2026 statewide ballot.

What should I do if the FTB questions my residency?

Involve a tax attorney before you respond. Residency audits turn on substantive facts about where your life centers, and your early responses shape the entire examination. Call Kugelman Law at (949) 835-0440 to discuss your situation in a privileged consultation.

About the author

Alex Kugelman is the founder and managing attorney of Kugelman Law, with nearly two decades of federal tax controversy experience, including U.S. Tax Court and U.S. District Court litigation. He is admitted in California and before the U.S. Supreme Court, the U.S. Tax Court, and the U.S. District Court for the Northern and Eastern Districts of California, and served as San Francisco Chair of the Federal Bar Association Tax Division in 2018. He has been quoted in the Financial Times and the New York Post on California’s billionaire tax and the state’s residency audits of departed wealthy residents. For business owners facing IRS examinations, his colleague Otto Bosch, a former IRS Revenue Agent from the Global High Wealth group, leads the firm’s audit-defense work. This article is attorney advertising and general information, not legal advice, and it describes a proposed ballot measure as of its publication date. Every tax matter turns on its own facts. Contacting Kugelman Law does not create an attorney-client relationship. ]]>