California wealth tax proposal leaves billionaires with little way out

A version of this article first appeared in CNBC’s Inside Wealth newsletter with Robert Frank, a weekly guide to the high-net-worth investor and consumer. Sign up to receive future editions, straight to your inbox.

The proposed California billionaire tax includes a special provision that makes it highly unlikely that anyone who wants to leave the state could avoid paying, according to tax attorneys.

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

“The reason they did this is obvious,” said Christopher Manes of Manes Law. “If they had made the date in November, after passage, you’d have 200 people who could 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 last several years, maintaining a personal residence in the city since 2020” and an office for his Founders Fund venture capital firm since 2021. Attorneys told CNBC that at least two other unnamed California billionaires have moved or made plans to move since the end of last year.

Nvidia CEO and California billionaire Jensen Huang, however, told Bloomberg he is “perfectly fine” with the proposed tax. 

“I’ve got to tell you, I have not even thought about it once,” Huang told Bloomberg. “We chose to live in Silicon Valley, and whatever taxes I guess they would like to apply, so be it. I’m perfectly fine with it.”

The Service Employees International Union-United Healthcare Workers West, which is backing the bill, said the proposed start date was to ensure that the billionaires “can’t avoid responsibility by moving their assets or claiming residency elsewhere.” They say the estimated $100 billion in revenue that would be raised is aimed at offsetting healthcare cuts from Washington and “making sure the wealthy pay their fair share.”

Yet attorneys say the aggressive timeline will likely invite legal challenges. And, it highlights a growing question for California tech founders and investors: how to plan a quick move to a lower-tax state before a big 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 – tax advisors in California said they were seeing a flood of new business even before the proposed wealth tax.

California’s rules around tax residency are complex. While New York bases its residency rules around “domicile” and whether a person is in the state for more than 183 days, California uses a measure called “the closest connection test.” According to Manes, the test uses a wide array of rules and measures to weigh a taxpayers connections to California versus their new home state. The measures typically include residency, social and family contacts, assets and work.

Changing residency or claiming non-residency for tax purposes can also trigger a second set of rules. A California taxpayer, for instance, has to not only buy a home or sign a lease in another state, but also prove they live there – through family photos, heirlooms and other signs of a true primary residence. A change of residency must occur before the taxable event, whether it’s a wealth tax or liquidity event.

“Intent is critical,” Manes said. “You have to show you intended to leave California indefinitely, permanently.”

Because establishing a change of residency takes time – typically months – attorneys say successfully escaping the proposed California wealth tax would be almost impossible.

“On its face, the ship has sailed,” Manes said.

Of course, it’s unclear whether California voters will approve the measure. Tax increases on California ballots have a mixed history, and Gov. Gavin Newsom is coordinating efforts to defeat the measure.

Attorneys also say that the retroactive provision makes it a certain 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,” they are less likely to allow it with “the creation of a wholly new tax,” attorneys say.

“I think the strongest legal challenges will be from people who leave before it’s passed,” said Jon Feldhammer a tax partner at Baker Botts.

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

Because billionaires have large teams of lawyers, accountants and logistical planners, they can mobilize quickly and make sure all the requirements are met for changing residency. They also typically already have homes in multiple locations and can more easily switch residencies, he said.

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