State-Level Wealth Tax Proposals and the California 2026 Billionaire Tax Initiative

State-Level Wealth Tax Proposals and the California 2026 Billionaire Tax Initiative

The debate over state-level wealth taxation in the United States has reached a critical empirical and technical milestone with the qualification of California's Proposition 40 (the 2026 Billionaire Tax Act, Initiative No. 25-0024) for the November 2026 ballot. Designed as a first-of-its-kind one-time wealth levy, the proposal has ignited an intense battle between progressive economists who project massive revenue windfalls and critics who warn of severe capital flight and a net negative fiscal outcome.

The Technical Design of Proposition 40

According to a legal analysis by Baker Botts, the initiative is highly structured to prevent avoidance, featuring aggressive valuation formulas, strict residency definitions, and robust apportionment rules:

• The Levy: A one-time 5% excise tax on the worldwide net worth of "applicable individuals" and "applicable trusts" with net worth exceeding $1 billion on December 31, 2026 (the valuation date).
• The Residency "Hook": An "applicable individual" is defined as any California resident as of January 1, 2026 (the tax obligation date). This backward-looking residency capture is designed as an exit-tax mechanic, attempting to tax individuals who were residents on Jan 1, 2026, even if they move out of state before the December 31, 2026 valuation date.
• The Valuation Formula for Private Assets: For non-publicly traded business entities, the initiative establishes a highly aggressive presumptive valuation formula: $$\text{Presumed FMV} = [(\text{entity book value}) + (7.5 \times \text{entity annual book profits})] \times \text{taxpayer's ownership %}$$ To challenge this valuation, the taxpayer must present "clear and convincing evidence" via a certified appraisal.
• Anti-Avoidance Rules: The initiative ignores traditional fractional interest discounts, includes property transferred for less than fair market value after October 15, 2025, and authorizes the Franchise Tax Board (FTB) to impose penalties on appraisers of up to 4% of any tax understatement.
• Strict Apportionment: The default rule apportions 100% of the tax to California. To obtain alternative apportionment, a taxpayer must prove by clear and convincing evidence that their wealth did not "substantially accumulate" or remain sustained in California for at least 365 days between January 1, 2023, and December 31, 2026. Even under alternative apportionment, the California share cannot fall below 25% unless a court finds it unconstitutional.

Proponents' Revenue and Economic Projections

The academic architects of the tax, Emmanuel Saez and Gabriel Zucman, alongside Jasper Boll, published an NBER working paper in May 2026 outlining the empirical case for the initiative. They argue that California's billionaire class is an incredibly wealthy and fast-growing tax base that currently pays negligible taxes relative to its wealth:

"California billionaires’ wealth exceeds $2 trillion today, the equivalent of 50% of California’s GDP. It has grown 144% from 2023 to 2025, fueled by the AI boom... The proposed one-off California billionaire tax of 5%, payable over 5 years, is both small relative to California billionaires’ wealth gains and large relative to the taxes they currently pay. We estimate that it could raise about $100 billion, with comparatively minor impacts on income tax revenue."

The Berkeley economists analyze the top four California billionaires—Larry Page, Sergey Brin, Mark Zuckerberg, and Larry Ellison (succeeded by Jensen Huang)—who together hold nearly $1 trillion in business wealth. They find that this group's wealth grew by 322% between 2023 and 2025, while their annual California income tax payments represented a mere 0.04% of their wealth. Even when accounting for potential interstate migration, Saez, Zucman, and Boll conclude that a wealth tax remains highly revenue-positive:

"Using empirical estimates of mobility responses to wealth taxation, we find that an annual wealth tax on California billionaires could raise substantial additional revenue even after accounting for income tax losses due to mobility."

Critics' Projections: The Laffer Curve and Net Negative Value

Conversely, a March 2026 study by the Hoover Institution led by Joshua Rauh presents a starkly different empirical picture. Rauh and his co-authors argue that the tax base has already eroded significantly prior to the tax taking effect, as billionaires "vote with their feet":

"The study... finds that the one-time levy would collect approximately $40 billion in wealth tax revenue, less than half of the roughly $100 billion projected by proponents. This is because many billionaires have already departed California, even before the initiative has qualified for the ballot... Six billionaires publicly departed California between the initiative's filing and the January 1, 2026, residency snapshot date, removing $536 billion, or nearly 30 percent of aggregate billionaire wealth, from the tax base."

The Hoover study incorporates the net present value (NPV) of lost future state income taxes resulting from these departures. Because California relies heavily on its top earners for income tax revenue (with a top marginal rate of 13.3%, or 14.4% including payroll taxes), the departure of even a few ultra-wealthy residents results in a massive structural revenue loss. Rauh concludes:

"Our analysis finds that the billionaire tax is likely to raise far less revenue than advertised, and once lost income tax revenue from departures is considered, it is likely to leave California worse off financially... under most scenarios, [it produces] a negative net present value of $25 billion.¹"