Tax Foundation Says California's Prop 40 Billionaire Tax Faces Serious Constitutional Tests

California's proposed one-time tax on billionaires carries legal defects that could undo it if voters approve it in November, according to an analysis published August 12 by the Tax Foundation. Proposition 40 would impose a 5% tax on the net worth of individuals worth more than $1 billion, using residency as of January 1, 2026 and asset values as of December 31, 2026. Jared Walczak, a senior fellow at the group, identifies problems ranging from retroactivity to the taxation of former residents, trusts and U.S. Treasury securities.

What the measure would do

The Secretary of State lists Proposition 40 for the November 3, 2026 ballot as an initiative constitutional amendment and statute that imposes a one-time tax on certain taxpayers. It describes itself as an excise tax on sustaining excessive accumulations of wealth. Because it is a single levy rather than an annual tax, the analysis notes, any ruling that invalidates its application before enactment could effectively eliminate the whole tax.

Two other measures on the same ballot bear on the debate. Proposition 41 would bar new state taxes that exclude revenue from the state spending limit, and Proposition 42 would prohibit new state personal property taxes and certain retroactive state taxes.

The legal objections

• Label versus substance. The analysis argues that courts look past the excise-tax label and would treat the levy as a property tax, which would run into California constitutional limits on taxing intangible property and uniformity rules.
• Retroactivity. The residency snapshot predates adoption by more than ten months, and courts have been skeptical of applying wholly new taxes to periods before enactment. Certain trust transfer provisions reach back to October 15, 2025.
• Former residents. The measure taxes people who were residents on the snapshot date on wealth measured after they leave, using 100% apportionment with no reduction for moving. The analysis argues this fails due process and commerce clause tests and burdens the constitutional right to travel.
• A 25% floor. Even taxpayers who prove by clear and convincing evidence that less than 25% apportionment is appropriate would still be taxed on at least 25%, which the analysis says is unconstitutional on its face.
• Trusts and spouses. The measure can tax trust assets with no California connection and attribute a nonresident spouse's out-of-state wealth to a resident spouse.
• Treasury securities. Federal law generally bars states from taxing federal obligations, and the measure contains no exclusion.
• Appraiser penalties. Certified appraisers could face penalties of up to 4% of a tax understatement for good-faith valuation errors, far above the federal cap of 125% of the appraisal fee, raising Excessive Fines Clause concerns.

The after-tax math

Example, illustrative round numbers: a founder who lived in California on January 1, 2026 holds $4 billion of net worth on December 31, 2026. At 5%, the tax would be $200 million. If she moved to another state in mid-2026, the measure as described would still apportion 100% of that wealth to California. If she could show that only 10% of the wealth was connected to California, the 25% floor would still yield a tax of at least $50 million, compared with $20 million under her proposed apportionment.

The direct tax reaches only billionaires. But the valuation and appraisal rules, trust provisions and residency approach would matter to advisors, trustees and appraisers who work with those families, and would be closely watched by other states considering wealth taxes.

Considerations for affected families

• How residency on January 1, 2026 is documented, since that date cannot be changed now.
• Whether trusts created or funded since October 15, 2025 are captured by the measure's look-back provisions.
• How hard-to-value holdings such as private company stock would be appraised, given penalty exposure for appraisers.
• How litigation timelines might affect when, or whether, any payment would ultimately be due.

Families in this position typically coordinate with California tax counsel, trust attorneys and valuation specialists.

What to watch

The November 3 vote is the first test. If Proposition 40 passes, legal challenges are widely expected, and the analysis suggests courts may not be able to rewrite defective provisions to save the tax. The outcome of Propositions 41 and 42 on the same ballot could also shape the legal landscape for any future wealth tax in California.

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