State-Level Wealth and Millionaire Taxes: California's Proposition 40 and Massachusetts' Overperforming Fair Share Surtax

State-Level Wealth and Millionaire Taxes: California's Proposition 40 and Massachusetts' Overperforming Fair Share Surtax

The debate over state-level wealth and high-income taxes has reached a critical empirical and political milestone in 2026. Proponents point to the massive revenue overperformance and lack of catastrophic flight in Massachusetts as proof of feasibility, while opponents of California's newly qualified Proposition 40 warn of severe capital flight and valuation nightmares.

California's Proposition 40 (The 2026 Billionaire Tax Act)

California's wealth tax debate has culminated in the official qualification of Proposition 40 (the 2026 Billionaire Tax Act, or CBTA) for the November 3, 2026 ballot. The initiative proposes a first-of-its-kind one-time 5% wealth tax on California billionaires, payable in annual installments of 1% over five years (2027–2031).

1. Revenue Estimates and the Tax Base

• Proponents' Scoring: An expert report by the initiative's drafters (Galle, Gamage, Saez, and Shanske) and a May 2026 NBER Working Paper by Boll, Saez, and Zucman estimate the tax will raise $100 billion over five years ($20 billion per year). This is based on Forbes real-time data showing 213 California billionaires with a combined net worth of $2.182 trillion (about 26.6% of the total US billionaire wealth). The proponents apply a conservative 10% tax avoidance and evasion rate, yielding a net projection of $99–100 billion.
• Hoover Institution Scoring: Researchers at the conservative-leaning Hoover Institution estimate a much lower revenue yield of around $40 billion, anticipating aggressive avoidance and legal challenges.
• Legislative Analyst's Office (LAO): The nonpartisan LAO projects near-term revenue in the "tens of billions" of dollars, with a minor potential offset of less than $1 billion per year in ongoing state income tax collections if some billionaires successfully emigrate.

2. Valuation and Avoidance Mechanics

The CBTA is designed with specific anti-avoidance and valuation mechanisms to address historical wealth tax shortcomings:

• Retroactive Residency Lock-in: The tax applies to individuals who were California residents as of January 1, 2026, but measures their worldwide net worth as of December 31, 2026. This retroactive date prevents billionaires from escaping the tax by changing their residency during the 2026 campaign.
• Private Business Valuation: For illiquid private assets, the CBTA implements a formulaic default: book value plus 7.5 times annual book profits (averaged over the prior three years), a method adapted from Switzerland's decades-long cantonal wealth tax. Taxpayers can opt out of the formula by submitting a professional appraisal.
• Illiquid Asset Deferral: To prevent cash-flow crises for entrepreneurs with wealth tied up in startups, the measure offers an optional deferral mechanism, allowing taxpayers to defer payments and pay as they extract value (distributions, loans, or sales) from their assets.

3. Political Opposition

Despite strong support from labor unions, the CBTA faces significant political opposition, notably from Democratic Governor Gavin Newsom, who has vowed to oppose the billionaire tax, citing concerns over the state's business climate.

Massachusetts' Fair Share Amendment: The Empirical Case Study

While California prepares for an electoral showdown, Massachusetts provides a highly successful empirical case study of a state-level progressive tax in action. Passed by voters in November 2022, the Fair Share Amendment imposes a 4% surtax on household income exceeding $1 million (adjusted to ~$1.1 million for inflation), on top of the state's flat 5% income tax.

1. Unprecedented Revenue Performance

In fiscal year 2026 (ending June 30, 2026), the Massachusetts Department of Revenue (DOR) certified that the surtax collected $3.38 billion (up over 13% from FY 2025's $2.987 billion). This marks the third consecutive year that the surtax has dramatically outperformed expectations, raising nearly three times the state's original baseline estimate of $1.2 billion.

2. The Migration Myth

Opponents originally warned of a "millionaire exodus." However, an April 2025 report by the Institute for Policy Studies (IPS) and the State Revenue Alliance, utilizing proprietary Wealth-X data, revealed that the number of millionaires (by net worth) in Massachusetts actually grew by 38.6% between 2022 and 2024, rising from 441,610 to 612,109 individuals. Their collective wealth grew by 37.3%, from $1.6 trillion to $2.2 trillion. The data suggests that high-net-worth individuals are highly rooted by local business, family, and social networks, making them far less mobile than anti-tax advocates predicted.¹