A model of this text first appeared in CNBC’s Inside Wealth e-newsletter with Robert Frank, a weekly information to the high-net-worth investor and shopper. Join to obtain future editions, straight to your inbox.
The proposed California billionaire tax features a particular provision that makes it extremely unlikely that anybody who desires to go away the state might keep away from paying, based on tax attorneys.
The Billionaire Tax Act, which could possibly be added to the state’s normal election poll in November, would impose a one-time tax of 5% on the entire wealth of California tax residents whose internet value is $1 billion or extra. Whereas new taxes sometimes take impact after they’re authorised, the proposed billionaire tax would apply to those that are California residents as of Jan. 1, 2026. The retroactive date left little time for California’s estimated 200 to 250 billionaires to alter their tax residency after they first discovered of the potential tax in December.
“The explanation they did that is apparent,” mentioned Christopher Manes of Manes Regulation. “If that they had made the date in November, after passage, you’d have 200 individuals who might get out in time and save tens of millions of {dollars}.”
California tech billionaire Peter Thiel introduced final week that he had “established a big presence in Miami over the past a number of years, sustaining a private residence within the metropolis since 2020” and an workplace for his Founders Fund enterprise capital agency since 2021. Attorneys instructed CNBC that a minimum of two different unnamed California billionaires have moved or made plans to maneuver because the finish of final yr.
Nvidia CEO and California billionaire Jensen Huang, nonetheless, instructed Bloomberg he’s “completely advantageous” with the proposed tax.
“I’ve obtained to inform you, I’ve not even thought of it as soon as,” Huang instructed Bloomberg. “We selected to reside in Silicon Valley, and no matter taxes I suppose they want to apply, so be it. I am completely advantageous with it.”
The Service Workers Worldwide Union-United Healthcare Employees West, which is backing the invoice, mentioned the proposed begin date was to make sure that the billionaires “cannot keep away from accountability by shifting their belongings or claiming residency elsewhere.” They are saying the estimated $100 billion in income that will be raised is geared toward offsetting healthcare cuts from Washington and “ensuring the rich pay their justifiable share.”
But attorneys say the aggressive timeline will doubtless invite authorized challenges. And, it highlights a rising query for California tech founders and traders: methods to plan a fast transfer to a lower-tax state earlier than an enormous liquidity occasion or firm sale. With synthetic intelligence driving a brand new wave of wealth creation in California – and including an estimated 50 new billionaires final yr – tax advisors in California mentioned they have been seeing a flood of recent enterprise even earlier than the proposed wealth tax.
California’s guidelines round tax residency are advanced. Whereas New York bases its residency guidelines round “domicile” and whether or not an individual is within the state for greater than 183 days, California makes use of a measure referred to as “the closest connection check.” Based on Manes, the check makes use of a wide selection of guidelines and measures to weigh a taxpayers connections to California versus their new dwelling state. The measures sometimes embody residency, social and household contacts, belongings and work.
Altering residency or claiming non-residency for tax functions may also set off a second algorithm. A California taxpayer, as an example, has to not solely purchase a house or signal a lease in one other state, but in addition show they reside there – by way of household pictures, heirlooms and different indicators of a real main residence. A change of residency should happen earlier than the taxable occasion, whether or not it is a wealth tax or liquidity occasion.
“Intent is vital,” Manes mentioned. “You need to present you supposed to go away California indefinitely, completely.”
As a result of establishing a change of residency takes time – sometimes months – attorneys say efficiently escaping the proposed California wealth tax can be virtually unimaginable.
“On its face, the ship has sailed,” Manes mentioned.
After all, it is unclear whether or not California voters will approve the measure. Tax will increase on California ballots have a blended historical past, and Gov. Gavin Newsom is coordinating efforts to defeat the measure.
Attorneys additionally say that the retroactive provision makes it a sure goal for lawsuits. Along with broader lawsuits claiming the tax is unconstitutional, taxpayers who go away earlier than November might declare the retroactive date violates due course of, based on attorneys. Whereas the Supreme Courtroom has allowed some retroactive taxes when there’s a “rational legislative goal,” they’re much less prone to permit it with “the creation of a completely new tax,” attorneys say.
“I feel the strongest authorized challenges will likely be from individuals who go away earlier than it is handed,” mentioned Jon Feldhammer a tax associate at Baker Botts.
Due to the energy of the authorized argument, Feldhammer mentioned some rich Californians are planning to go away this yr, after the Jan. 1 efficient date however earlier than the tax goes to voters in November.
As a result of billionaires have giant groups of attorneys, accountants and logistical planners, they will mobilize rapidly and ensure all the necessities are met for altering residency. In addition they sometimes have already got properties in a number of areas and may extra simply swap residencies, he mentioned.
“You are speaking about essentially the most moveable class in America,” Feldhammer mentioned. “They’ve the means and talent to maneuver in a short time.”
