The Proposed California Wealth Tax Is Far Higher than 5 Percent

Introduction

The 2026 Billionaire TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities.Act,[1] a California ballot initiative, would ostensibly impose a one-time tax of 5 percent on the net worth of the state's billionaires. Due, however, to aggressive design choices and possible drafting errors, the actual rate on taxpayers' net worth could be dramatically higher.

One particularly momentous policy choice has the potential to strip the founders of some of the world's largest companies of their controlling interests and force them to sell off a significant portion of their shares. This could send stock prices plummeting to the detriment of tech employees and investors of all stripes, including ordinary workers whose 401(k)s would take a beating if Silicon Valley founders had to offload their shares in a hurry.

The poorly drafted initiative creates many scenarios in which tax liability would be vastly more than 5 percent of net worth, but this analysis focuses on six of them:

1. Valuation can be based on voting interests in a company when they exceed actual economic stakes.
2. Assessment rules for privately held businesses can substantially overvalue them.
3. Draconian underpayment penalties for taxpayers and potentially ruinous penalties for their appraisers encourage substantial overstatement of the value of privately held businesses to avoid a dispute with tax authorities.
4. Presumptive drafting errors on anti-avoidance rules result in taxing significantly more than the amount of the transfers.
5. Provisions regarding spousal assets and indebtedness to relatives would tax a nonresident spouse's assets and, in the event of a divorce, would tax the California resident on formerly held assets that had been obligated to the ex-spouse in a divorce settlement.
6. Deferral regimes have eligibility limitations and impose additional costs, and run the risk of taxing wealth that might no longer exist.

Each of these features makes an already unprecedented tax even more destructive. If the initiative passes, California must brace for an exodus of founders and investors fleeing not just extraordinarily high tax burdens, but also the potential loss of the companies they created. A loss of jobs, startups, investment capital, and economic growth would be among the consequences of a large wave of departures, and of the tax burden on those who remain or whom state officials deem not to have escaped the clutches of the tax.

Valuation by Voting Rights Can Break Up Controlling Interests

The proposed wealth taxA wealth tax is imposed on an individual's net wealth, or the market value of their total owned assets minus liabilities. A wealth tax can be narrowly or widely defined, and depending on the definition of wealth, the base for a wealth tax can vary.has distinct valuation methods for different asset classes and ownership structures. Publicly traded assets are valued based on the assets' market trading value, but there are different rules for assets that are not publicly traded.

Under the initiative, "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."[2]

Founders often hold private Class B or other super-voting shares with transfer restrictions preventing them from being sold to the public, but which confer voting control over a publicly traded company. Together, for instance, Larry Page and Sergey Brin own about 11.3 percent of Alphabet (Google) but control 52.3 percent of voting rights. Similarly, Mark Zuckerberg owns about 13.6 percent of Meta but has 61.0 percent voting control.[3]

It is possible that the California Franchise Tax Board (FTB), charged with administering the new tax, would determine that these shares are publicly tradable because they have an ascertainable value and can be converted into tradeable Class A shares under a dual-class structure. In that case, they would be taxed by their market value.

Of considerable concern for founders, though, is the very real possibility that they would not be considered publicly traded assets, in which case the proposed wealth tax would apply to founders' and early investors' share of voting rights, even if they are not at all representative of their actual economic stake in the company. This could force founders to convert their Class B shares to Class A and sell them as common stock, surrendering their controlling stakes and liquidating large portions of their investment.[4]

Two billionaires represent opposite extremes: Tony Xu, the founder of DoorDash, owns 2.6 percent of his company but controls 57.6 percent of the vote, yielding wealth tax liability of $2.62 billion on an ownership interest worth $2.41 billion. Since selling his shares incurs capital gains taxA capital gains tax is levied on the profit made from selling an asset and is often in addition to corporate income taxes, frequently resulting in double taxation. These taxes create a bias against saving, leading to a lower level of national income by encouraging present consumption over investment. ,moreover, and the entire value of these shares is capital gains for him, his total tax liability for his DoorDash shares would be $4.17 billion-173 percent of their value. The tax would bankrupt him absent an FTB determination to set aside this valuation. (Xu's valuation is so clearly incorrect that he would almost certainly prevail on this point. Others may have less success.)

Conversely, Jensen Huang of NVIDIA is the rare founder without preferred voting shares. His 3.8 percent stake in NVIDIA gives him 3.8 percent of the vote, yielding wealth tax liability of $8.5 billion on an ownership interest worth $170 billion.

Most founders are somewhere in between, but their voting share is typically much larger than their ownership share. They would be required to sell off significant stakes in their companies to pay the tax in 2027. Those sell-offs might reduce the price they can get for the shares even though the taxable valuation would be fixed at December 31, 2026, levels, before the share liquidation. The consequences of founders relinquishing control and dumping vast holdings, moreover, would be significant-in some cases, potentially catastrophic-for employers and investors as well.

Founders could challenge the voting rights assumption, arguing that substituting their economic stake plus some control premium is necessary to avoid a substantial overstatement of liability,[5] but since drafters gave priority to voting rights with a clear understanding that they often dramatically outstrip actual ownership stakes, the FTB and the courts might be loath to permit alternative valuations in all but the most extreme cases. Furthermore, as discussed later, proposing an alternative through the submission of a certified appraisal carries its own risks.

The only other possible "out" for such founders would be the use of Optional Deferral Accounts (ODAs), discussed later, but this would also put founders under substantial constraints and would retain the inflated tax liability generated by voting interests.

The following table shows voting and ownership shares for six tech founders, with estimates of their wealth tax liability and their total liability (net of capital gains tax on the distributions made to satisfy wealth tax liability), and how that liability compares to the total value of their holdings.

Table 1. Corporate Founders Lose Controlling Interests and Face Extremely High Rates Under Wealth Tax

Note: Total Tax includes federal and California capital gains tax on liquidating assets to remit wealth tax owed. Market cap and other corporate financial data are as of January 13, 2026. Value and tax share of value are based on the estimated share of ownership in the founder's company, excluding any other investments. Estimates assume that super-voting shares are not publicly traded assets for the purpose of the proposed wealth tax. In some cases, taxpayers may be able to pursue alternative valuation methods.

Source: Fintool data on founders' equity and voting stakes; Tax Foundation calculations.

Brin and Page already cut ties with California, reportedly leaving before the January 1, 2026, residency date indicated in the initiative.[6] Since the measure's retroactive "snapshot" assessment date is sure to draw a legal challenge, many other founders-incentivized not only by personal financial considerations but also by the desire to retain voting control over the companies they founded-may do the same should the initiative gain steam, and particularly if it is approved by the voters in November.

Assessment Rules for Private Businesses Can Substantially Overvalue Them

Private business interests are notoriously difficult to value. The initiative's valuation rules make a challenging proposition worse by requiring systematic overstatements of business value.

Fair market value for non-public businesses is presumed to be equal to Generally Accepted Accounting Principles (GAAP) book value plus 7.5 times average annual profits, multiplied by the taxpayer's percentage interest in the company.[7] Many closely held businesses do not use GAAP accounting. Beyond that initial hurdle, this approach uses an accounting concept (book profit) without regard to features that drive market pricing, including risks, cyclicality, capital intensity, regulatory exposure, and, most importantly in the case of closely held firms, illiquidity. All these factors would ordinarily translate into valuation discounts compared to a publicly traded company with similar profits, but the rules of the proposed wealth tax ignore this distinction.

The initiative also establishes a floor that can overvalue struggling businesses. If a business is posting losses, its book profits are treated as $0, not a negative value, meaning that losses do not reduce the value of the business for tax purposes.[8] Other valuation floors can lock in outdated valuations that may not reflect a company's present-day reality.

For instance, the measure holds that a business's value cannot be less than the valuation reflected in any funding round or equity sale within the past two years unless the taxpayer can demonstrate by clear and convincing evidence-a high standard-that the valuation would significantly overstate the entity's value.[9] But a company's value can decline in two years, and valuations in equity rounds often involve preferred terms that are not available to all owners and which would overvalue the company as a whole when used as a valuation floor.

Additionally, the initiative denies ordinary discounts for minority interests and lack of marketability, even though any realistic valuation would take these factors into account. A stake in an illiquid company is not worth as much as a similar fully liquid stake, and the ownership stake cannot be sold at a price that disregards that discount-assuming it can be sold at all.

If a taxpayer has a profit interest in a business entity, moreover, their ownership share is presumed to be at least the maximum interest in the company's profits they may earn subject to certain conditions being met, even if those conditions have not yet been-and may never be-met.[10] This provision taxes interests the taxpayer does not actually possess.

Other provisions stipulating that fair market value excludes forced-sale pricing and treating insurance coverage as a valuation minimum can also artificially inflate business value,[11] overstating what the taxpayer's share of the company is worth on the open market. And forced-sale pricing could be exactly what taxpayers get if they liquidate some or all of their holdings to pay the wealth tax.

Draconian Penalties Incentivize Overstatement of Liability

Some prior wealth tax proposals have charged tax authorities with valuing billionaires' assets, including the value of their closely held (non-traded) businesses. The California initiative relieves the state of that burden and instead charges the taxpayers themselves with determining their net worth and remitting the appropriate tax on it.

For traded assets, like shares in a publicly traded company, these valuations are straightforward. For a privately held business, however, valuation is innately difficult. Particularly for startups, valuation may be speculative and uncertain, even given the valuation rules provided in the initiative. Good faith estimates could vary substantially.

The proposed wealth tax, however, does not tolerate different answers arrived at in good faith. If the FTB settles on a different valuation than the one certified by the taxpayer, then a penalty applies to any resulting underpayment: 20 percent for an understatement of tax liability that exceeds the greater of $1 million or 20 percent of the tax shown on the taxpayer's return, and 40 percent for an understatement of liability that exceeds the greater of $10 million or 40 percent.[12] These are large amounts, to be sure, but the range of valuations one might reasonably attach to a promising tech startup pre-IPO, for instance, could easily vary by that much.

Certified appraisals could also be used when arguing for an alternative valuation for Class B shares, contending that using voting rights rather than economic stake substantially overstates the value of these holdings. It would be up to the appraiser to determine what premium to attach to their super-voting privileges, and should the FTB disagree with that determination, this could yield substantial penalties.[13]

Notably, penalties for underpayment do not end with the taxpayer. If a substantial underpayment is attributable to a certified appraisal, then the FTB is permitted to impose penalties on the appraiser at 2 or 4 percent of the understatement of tax. For an appraiser, such a penalty could be ruinous, and the result-besides any costly insurance-would be to incentivize appraisers to be more solicitous to the state, padding appraisals (particularly on hard-to-appraise businesses) to avoid serious financial penalty.

Imagine, for instance, a private business the FTB concludes is worth $6 billion. If the appraiser thought it was worth $5 billion, they could personally owe $1 million in penalties, in addition to the $10 million in penalties imposed on the taxpayer.

Poorly Drafted Anti-Avoidance Rules Can Over-Tax Transfers

The initiative's drafters included anti-avoidance rules that, among other things, disregard transfers intended to reduce wealth tax liability. Under the proposal, for instance, a billionaire cannot transfer wealth or incur a debt to their children to reduce liability, cannot escape wealth taxation by transferring property to a trust, and cannot work around limits on such transfers by selling assets for less than market value. The way these provisions are written, however, will dramatically overstate taxable net worth in at least two ways.

First, the language captures the entire value of any trust to which assets are transferred in 2026, not just the value of that transfer. Under the proposal, "net worth shall for all purposes include the value of property held by any trust (other than a grantor trust or tax-exempt trust) to which the individual transfers property in 2026, and seventy-five percent of the value of such property transferred in 2025."[14]

Perhaps the intention was to tax the full value of transfers made in 2026 and 75 percent of the value of transfers made in 2025 (the extreme retroactivity of the latter provision will certainly be challenged), but as written, the initiative incorporates 75 percent of the value of transfers made in 2025 but the full value of property held by any trust to which property was transferred in 2026. This would expose the entire trust to taxation as if it were the taxpayer's wealth.

Curiously, a provision providing for proportional allocations if multiple people contributed to the same trust suggests that the 2026 treatment is not a drafting error, even though its implications are hard to comprehend as intentional policy and are inconsistent with the "ordinary" treatment of transfers made in 2025.[15]

Second, net worth includes "the value of any property the individual transferred . . . for less than fair market value after October 15, 2025," provided that property's value exceeds $1 million. This is intended to address a scenario under which a covered taxpayer "sells" an asset to a friend or family member for a trivial or deeply discounted amount, but in a way that is not a consideration-free transfer that would be disregarded under other anti-avoidance rules. As written, however, the amount added back to net worth is the entire value of the transfer, not the difference between the sale price and fair market value. If the FTB reviews a billionaire's sale of an asset and concludes that it was underpriced, intentionally or otherwise, this provision could require that tax be paid as if the asset was never sold and was still in the possession of the taxpayer.

Elsewhere in the proposal, drafters are at pains to establish that the fair market value of an asset "shall not be . . . [t]he price that a forced sale of the property would produce,"[16] but in practice, the need to obtain liquidity to pay the tax could force taxpayers to sell assets at prices well below their ordinary market value. If a taxpayer began selling assets in 2026 in anticipation of 2027 tax liability, and did so at a discount, they could theoretically be taxed on both the forgone asset and the income it brought in. The FTB may choose not to take such an aggressive posture, but the language creates meaningful risk.

Marriage and Divorce Can Both Lead to Over-Taxation

The wealth tax's aggressive residency rules can establish a billionaire as a California resident for wealth tax purposes even if they are not domiciled in California and are a resident in another state for income tax purposes. Consequently, it is possible for one spouse to have wealth tax residency and the other not to, even if they do not live apart by ordinary definitions. A nonresident spouse's wealth is included in the covered taxpayer's net worth for wealth tax purposes.

Additionally, whether one or both spouses are California residents, the tax is imposed at a household level, so a couple with a combined net worth of $1 billion or more is subject to the tax, whereas two unmarried individuals with just under $1 billion apiece would not be taxed.

These peculiarities might lead a sufficiently tax-motivated couple to revisit their marriage vows: until they are parted by death or taxes. A timely divorce could yield substantial tax savings, especially if a nonresident billionaire spouse's wealth is swept into the tax. Whether California would acknowledge the divorce or treat it as an avoidance strategy and disregard it is unclear.

An even thornier issue arises if a billionaire couple divorces in 2026 without tax savings in mind. Debts to related persons are added back to net worth if incurred after October 15, 2025,[17] and a related person is defined as "any person that is related to the taxpayer . . . as of January 1, 2026."[18] If a divorce resulted in a division of assets, any indebtedness to the taxpayer's ex-spouse would be treated as if no such debt was incurred, with those assets still subject to tax.

Taxpayers could avoid this trap by finalizing divorce terms and paying out by year's end,[19] but in some cases, they may be constrained by liquidity issues, exacerbated by the tax bill coming due.

Deferral Regimes Raise Costs and Introduce Risk

Taxpayers subject to the proposed wealth tax have the option of remitting the entire amount with their tax payment for 2026 (by April 2027) or paying it in five annual installments, subject to a 7.5 percent annual deferral charge on the remaining unpaid balance. With deferral charges, the effective rate becomes 5.75 percent of asset value as of December 31, 2026.

Investments can, of course, lose value. Businesses can fail. If an illiquid taxpayer whose wealth is tied up in their business elects to pay over five years and their net worth declines sharply during that period, then they are still liable based on their net worth as measured at the end of 2026. They could owe substantial tax on wealth that no longer exists.

Certain liquidity-constrained taxpayers would be eligible for Optional Deferral Accounts (ODA), under which tax would be owed every time income from non-traded assets was realized or any withdrawal or transfer was made, until the tax indebtedness was paid in full. Functionally, the state becomes a co-investor in the assets. If these assets appreciate in value over time, California can tax the additional accumulated wealth even if the taxpayer has long since left the state. But unlike with the five-year deferral option, if the assets decline in value, California is also a partner in that reduction in value.

These accounts are only available to those with wealth tax liability in excess of the combined value of their publicly traded assets.[20] Because capital gains tax would have to be paid on publicly traded assets sold to satisfy wealth tax liability, it would be possible for a taxpayer to have publicly traded assets worth more than their wealth tax liability but still be insufficiently liquid to cover actual liability-and be ineligible for an ODA.

Some of the language surrounding ODAs is ambiguous. However, eligibility for an ODA is a threshold question of whether publicly traded assets exceed liability, but once a taxpayer is eligible to maintain an ODA, they can only attach assets to the account "to the extent that the amount of additional tax that would be owed . . . (without the use of an ODA) would exceed the sum of the combined value of all the taxpayers' [publicly traded] assets."[21] This suggests that any taxpayer using an ODA must first liquidate all traded assets and use them to satisfy whatever portion of wealth tax liability they can, attaching assets to the ODA for the residual amount owed.

Founders with Class B super-voting shares may be able to place those shares in an ODA to avoid the need to divest control of the company, but only after selling off all other tradable assets other than personally owned real property. Their remaining liability would still be based on the expansive asset valuation based on voting rights rather than actual ownership, and they would owe 5 percent on any material distributions until tax liability was fully satisfied. Entering into an ODA also subjects taxpayers to California personal jurisdiction indefinitely and binds them to whatever contractual terms and regulatory requirements the state devises for assets attached to the deferral account, which may prove restrictive.

Conclusion

The California Billionaire Wealth Tax ballot initiative, through a mix of intentionally aggressive policy design and potentially inadvertent drafting choices, would impose liability far in excess of 5 percent of net worth for many taxpayers.

Any wealth tax imposes significant economic costs, and the impact of a state-level tax of 5 percent is likely to be particularly severe. But 5 percent is a profound understatement. The initiative systematically overvalues assets, exacerbating the proposed tax's economic harm and enhancing the case for outmigration to avoid such an aggressive, economically destructive tax.

The initiative's drafters sought to forestall an exodus by selecting a January 1, 2026, date for determining residency, but that provision is highly susceptible to legal challenge. Given the many ways that tax liability can far outstrip the advertised 5 percent rate, many billionaires may wish to test the validity of that residency standard if the tax appears poised for passage, depriving the state of jobs, investment, and existing tax revenue from some of the key players in California's economy.

References

[1] Initiative No. 25-0024A1 (Cal. proposed 2026), https://oag.ca.gov/system/files/initiatives/pdfs/25-0024A1%20%28Billionaire%20Tax%20%29.pdf.

[2] Id., § 50303(c)(3)(C).

[3] All voting rights and ownership figures are obtained or calculated from Fintool, https://www.fintool.com. Market caps are from Google Finance, as of January 13, 2026. Figures should be regarded as approximate, based on available public information, and do not reflect holdings outside the founders' own companies.

[4] Converting to Class A in advance to avoid valuation by voting rights would almost certainly be countered by anti-avoidance rules, with the FTB disregarding the conversion.

[5] Initiative No. 25-0024A1, § 50303(c)(3)(F).

[6] Ryan Mac, Theodore Schleifer, and Heather Knight, "Google Guys Say Bye to California," The New York Times, Jan. 9, 2026, https://www.nytimes.com/2026/01/09/technology/google-founders-california-wealth-tax.html.

[7] Initiative No. 25-0024A1, § 50303(c)(3)(E).

[8] Id.

[9] Id., § 50303(c)(10).

[10] Id., § 50303(c)(3)(D).

[11] Id., § 50303(a)(1) and -(c)(10).

[12] Initiative No. 25-0024A1, § 50312.

[13] Penalties can be avoided by adequate disclosure of relevant facts and a reasonable basis for the tax treatment proposed, see § 50312(h), but there is no clear-cut rule for which facts might be relevant in determining the value of untraded shares conferring super-voting rights, and the FTB could argue that a valuation it determines to be aggressively low lacked reasonable basis. The chilling effect remains.

[14] Id., § 50303(c)(6)(B).

[15] Id.

[16] Id., § 50303(a)(1).

[17] Id., § 50302(e).

[18] Id., § 50308(k).

[19] This would still be a transfer to a related person, but transfers are only clawed back if for less than fair market value, and presumably the FTB would treat a court-order split as a transfer for full market value.

[20] Id., § 50304.

[21] Id., § 50304(c).

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