California’s wealth tax proposal leaves billionaires with little recourse

A version of this article first appeared in CNBC’s Inside Wealth newsletter with Robert Frank, a weekly guide for the high-net-worth investor and consumer. subscription To receive future issues, directly to your inbox.

California’s proposed billionaire tax includes a special provision that makes it unlikely that anyone who wants to leave the state will be able to avoid paying, according to tax attorneys.

The Billionaire Tax Act, which could be added to the state’s general ballot in November, would impose a one-time 5% tax on the total wealth of California tax residents with a net worth of $1 billion or more. While new taxes typically take effect after approval, the proposed billionaire tax would apply to California residents starting Jan. 1, 2026. The retroactive date left little time for an estimated 200 to 250 California billionaires to change their tax residency after they first learned of the potential tax in December.

“The reason they did this is clear,” said Christopher Maness of Maness Law. “If they set the date in November, after passing, you’ll have 200 people who can get out in time and save millions of dollars.”

California tech billionaire Peter Thiel announced last week that he had “established a significant presence in Miami over the past several years, maintaining a personal residence in the city since 2020” and an office for venture capital firm Founders Fund since 2021. At least two unnamed California billionaires have moved or made plans to move since the end of last year, lawyers told CNBC.

However, Nvidia CEO and billionaire Jensen Huang told Bloomberg that he is “absolutely fine” with the proposed tax.

“I have to tell you, I haven’t thought about it even once,” Huang told Bloomberg. “We chose to live in Silicon Valley, and whatever taxes I think they want to implement, so be it. I’m totally fine with that.”

The Service Employees International Union-Western Union of Health Care Workers, which supports the bill, said the proposed start date is to ensure billionaires “cannot avoid liability by moving their assets or claiming residency elsewhere.” They say the estimated $100 billion in revenue to be raised is intended to offset health care cuts from Washington and “make sure the wealthy pay their fair share.”

However, lawyers say the strict timeline is likely to raise legal challenges. It highlights a growing question for California tech founders and investors: How to plan a quick move to a lower-tax state before a major liquidity event or company sale. With artificial intelligence driving a new wave of wealth creation in California – and adding an estimated 50 new billionaires last year – California tax advisors said they are seeing a flood of new business even before the proposed wealth tax.

California’s rules about tax residency are complex. While New York bases its residency rules on “domicile” and whether a person has been in the state for more than 183 days, California uses a metric called the “closest contact test.” According to Manis, the test uses a wide range of rules and measures to evaluate a taxpayer’s ties to California versus their new home state. Measures usually include residence, social and family contacts, assets and employment.

Changing residence or claiming non-residency for tax purposes can also trigger a second set of rules. California taxpayers, for example, not only have to buy a home or sign a lease in another state, they also have to prove they live there — through family photos, heirlooms and other signs of true primary residence. The change of residence must take place before the taxable event, whether it is a wealth tax or liquidity event.

“Intent is critical,” Maness said. “You must prove that you intend to leave California indefinitely and permanently.”

Because changing residency takes time – usually months – lawyers say successfully evading California’s proposed wealth tax would be nearly impossible.

“On the surface, the ship has sailed,” Maness said.

Of course, it is not clear whether California voters will approve this measure. Tax increases on the ballot in California have a mixed history, and Gov. Gavin Newsom is coordinating efforts to reject the measure.

Lawyers also say the retroactive provision makes it a specific target for lawsuits. In addition to broader lawsuits claiming the tax is unconstitutional, taxpayers who leave before November could claim the retroactive date violates due process, according to attorneys. While the Supreme Court has allowed some retroactive taxes when there is a “rational legislative purpose,” it is unlikely to allow it while “creating an entirely new tax,” lawyers say.

“I think the strongest legal challenges will be from people who leave before the law is passed,” said John Feldhammer, a tax partner at Baker Botts.

Because of the strength of the legal case, Feldhammer said some wealthy Californians plan to leave this year, after the Jan. 1 effective date but before the tax goes to voters in November.

Since billionaires have large teams of lawyers, accountants and logistical planners, they can mobilize quickly and ensure that all requirements for a change of residence are met. They usually already have homes in multiple locations and can switch residences more easily, he said.

“You’re talking about the most portable category in America,” Feldhammer said. “They have the means and the ability to move very quickly.”