What Lies Beneath California’s Billionaire Tax Initiative?

The ballot initiative, titled the “2026 Billionaire Tax Act,” can be found here.

Background

In response to federal cuts to Medicaid and food assistance programs, SEIU United Healthcare Workers West filed a ballot initiative with the California Attorney General titled the 2026 Billionaire Tax Act. The initiative must gather 875,000 signatures by April to eventually be included on the November ballot.

The ballot initiative seeks to impose a 5% tax on the total net worth (excluding real estate, pensions, and retirement accounts) of 200-250 California residents with a net worth of at least $1 billion. If passed, the tax is expected to generate over $100 billion in revenue for the healthcare and food assistance industry. 

The pressing question is whether the tax is the appropriate tool to achieve the stated goals. What are the downstream effects of this unprecedented tax?

This article does not argue that billionaires should not pay more. It asks whether the structure of this particular tax could create unintended consequences that reach beyond the people it targets.

Supporters’ Rationale

Proponents cite the federal cuts as the catalyst for this measure. They believe that this substantial one-time revenue from the ultra-wealthy without raising taxes on the broader public is a reasonable solution. They contend that taxing accumulated wealth, rather than relying on volatile capital gains income, would ensure that billionaires pay their “fair share,” which they argue is not happening under the current system. Supporters further maintain that this approach could promote greater fiscal stability and help address wealth disparities that accelerated during the COVID-19 pandemic.

Voting Control and Valuation

Gary Tan, the CEO of Y Combinator, has criticized the initiative’s attribution of ownership based on voting control rather than economic interest. He says that the tax is “poorly defined and designed to drive tech innovation out of California.” Section 50303(c)(3)(C) of the proposed 

2026 Billionaire Tax Act reads: “For any interests that confer voting or other direct control rights, the percentage of the business entity owned by the taxpayer shall be presumed to be not less than the taxpayer's percentage of the overall voting or other direct control rights.” As currently drafted, this language will inevitably cause founders with voting control beyond their economic interests to be taxed on wealth they do not actually own or have the liquidity to pay for.

For startups and other companies, there are instances when a founder holds minimal equity while retaining super-voting control. In a dual-class structure, one class of shares typically carries one vote per share. In contrast, another class carries multiple votes per share, giving certain shareholders greater control over the company. As a result, Section 50303(c)(3)(C) artificially inflates the individual’s taxable wealth above the liquid or economic stake. Section 50303(c)(3)(C) may chill dual-class structures and long-term founder governance models. Often, founders who build companies with super-voting control are trusted with the authority to carry out their vision and drive market efficiencies, benefiting society as a whole.

Illustration

• Founder Frank owns a 3% economic interest 

• Frank maintains 30% voting control through 10x supervoting shares

• He would be taxed as if he owned 30 percent of the company’s value, even though he receives only 3 percent of the economic benefit, resulting in a disproportionate tax burden relative to his actual ability to pay

Source: Tax Foundation

Illiquidity and Founder Risk

Palmer Luckey, creator of the Oculus Rift and co-founder of Anduril Industries, stated, “I made my money from my first company, paid hundreds of millions of dollars in taxes on it, used the remainder to start a second company that employs six thousand people, and now me and my cofounders have to somehow come up with billions of dollars in cash.” Luckey is pointing to the concern that paper valuations of companies could trigger tax consequences that founders may simply be unable to pay. 

Luckey’s concern is that unrealized equity in private or closely held companies could trigger tax liability that founders are simply unable to pay. The lack of meaningful protections for illiquid equity could cause founders to sell shares, prioritize short-term profits, surrender control, or take on significant debt if valuations later decline.

If founders are forced to divert capital or lose control of companies to satisfy tax obligations, long-term investment in innovation could suffer. Ultimately, this can lead to fewer growth jobs and consumer benefits across the broader economy.

Systemic Market Consequences

The net worth of an individual or the paper valuation of a private company is often, at best, an estimation. The uncertainty of this value will lead to disputes and prolonged fights over appraisal assumptions. As a result, broader market instability could materialize.

Founders who are forced to sell shares to satisfy tax obligations will most likely forgo the ability to maximize reinvestment for growth. These large sales of stock by concentrated holders can depress prices and increase valuation volatility.

As innovation and incentives start to dissipate, startups could lose funding, banks may tighten lending, investor confidence may weaken, and founders may choose not to build in California. 

The choice to tax the most successful founders before public buyers confirm the valuation of their business introduces risks at one of the most pivotal stages of company formation.

In sum, market efficiencies can start to suffer as productivity decreases. While these are lofty claims, they remain a possibility. The startup ecosystem of Silicon Valley, which has fueled innovation, is starting to lose its incentive to build companies. Countries around the world have attempted to replicate Silicon Valley’s innovation ecosystem and have largely failed. Risking what took decades of sustained effort, capital, and risk-taking to build would be a bold and consequential choice.

Source: Gary Tan

A Shift in Tax Structure

This is a new tax system that is being introduced. While supporters will posit that it is akin to a property tax, it remains unprecedented. Put simply, this is a tax on net worth, which includes unrealized gains. While the initiative repeatedly says it is a “one-time” tax, critics have noted that it is a Trojan horse. To shift taxing realized transactions to taxing owned assets will alter the traditional boundary we have associated between income and property. This shift is by no means a light endeavor. California will be tasked with discerning the valuations of residents’ net worth. Critics contend that if fiscal pressures and funding gaps arise in the future, there will be an incentive to broaden the base that this type of tax captures. So while “Billionaires” are the subject of this tax, creating a precedent of legal taxation with the appropriate infrastructure could result in more being included in the future.

Capital Flight and Economic Impact

A natural reaction is to ask why any of this matters if the burden falls only on billionaires. 

However, the effects are already becoming clear. Billionaires have already begun fleeing from California, a term commonly referred to as capital flight. Some of the individuals who have reportedly left California include Larry Page, Sergey Brin, Larry Ellison, Peter Thiel, David Sacks, and Mark Zuckerberg. Andy Fang, the co-founder of DoorDash, posted that the law “could wipe me out,” and that it would be “irresponsible for me not to plan on leaving the state.” 

Chamath Palihapitiya stated, “We had $2T of billionaire wealth just a few weeks ago. Now, 50% of that wealth has left.” Palihapitiya goes on to explain that the downstream effects of this capital flight are that California's tax base starts to erode. California could lose not only income tax revenue from these individuals but also sales tax, property tax, and related economic activity generated by their presence. As marginal tax risk becomes unpredictable, the exit becomes a rational economic response.

High-net-worth individuals are highly mobile. The Act’s retroactive January 1, 2026, residency trigger, using California’s stringent “closest connections” test, aims to prevent pre-enactment capital flight. Yet billionaires, unlike ordinary taxpayers, can rapidly restructure domicile and assets across jurisdictions.

Critics contend the tax could shrink the long-term tax base if wealthy residents relocate, as seen in countries like France and Norway. Various economic models suggest that domestic investment could be reduced, with foreign ownership of assets supplementing it. Given the mobility of high-net-worth individuals, the measure could gradually erode the very revenue base it seeks to strengthen. If the tax reduces investment and shrinks the state’s tax base, its effects could extend beyond the billionaires it targets.

Alternative Reform Approach

Others have voiced support for billionaires paying a more proportionate share of their wealth in taxes, but believe the mechanism of the 2026 Billionaire Tax Act is not the appropriate means to achieve it. Bill Ackman expressed that the appeal to billionaires lies in their ability to borrow against appreciated stock, which does not trigger tax consequences, often referred to as “buy, borrow, die.”

The common scenario is as follows: a founder starts a company and has a tax basis in stock of $5 million; the company grows; the stock is now worth $500 million, and the founder sells no shares. Instead, the founder takes out a $100 million loan secured by the stock. Under current law, no sale has occurred, no capital gains have been triggered, and the founder will live off the loan proceeds. 

Ackman’s solution is to treat the loan amount in excess of the basis as if the stock were sold. So, in the scenario, $95 million would be treated as if the stock were sold. That $95 million would be treated as if the stock had been sold, triggering a tax of capital gains on that amount. At an estimated 20% rate, the tax owed would be approximately $19 million.

While critics may identify practical or administrative concerns with this approach, the core principle seeks to tax consumption funded by appreciation rather than impose a levy on unrealized wealth itself.

Legal Challenges Ahead

While much of the backlash to the Billionaire Tax focuses on the economic consequences it may have for California, numerous legal challenges would likely be litigated if it is enacted in November 2026.

If enacted, the initiative would likely face legal challenges on several grounds that have been identified by commentators, including: (1) the Dormant Commerce Clause, including application of the Complete Auto test; (2) the Due Process Clause of the Fourteenth Amendment; (3) the realization requirement, in light of Moore v. United States (although the case interpreted the Sixteenth Amendment and did not directly resolve whether appreciation of wealth qualifies as realized income); (4) the retroactive nature of the tax; (5) the constitutional right to travel; (6) the Takings Clause; and (7) the prohibition against bills of attainder.

Political Divisions

California Governor Gavin Newsom opposes the tax, fearing it could drive away tech titans and put the state at a competitive disadvantage. As a direct-to-voters ballot initiative, Newsom would not have the power to veto the tax if the proposal passed. Congressman Ro Khanna has voiced his support for the tax and even took to social media, sarcastically saying, “I will miss them very much” regarding the tech billionaires of Silicon Valley. Despite being a supporter of Silicon Valley’s tech ecosystem, Khanna believes the tax is a practical answer to the shortfall in healthcare. 

Rep. Kevin Kiley has introduced a bill to fight California’s wealth tax. The bill seeks to prohibit the imposition of a retroactive tax on the assets of nonresident individuals.

Conclusion

This story is still being written. Whether the 2026 Billionaire Tax Act is enacted will ultimately be decided by voters. There are strong voices on both sides. What matters is that we pause, look beyond the headline, and ask deeper questions about the second-order effects of a tax of this magnitude.

*The views expressed in this article do not represent the views of Santa Clara University.