California wealth tax proposal leaves billionaires with little way out

A version of this article originally appeared in CNBC’s Inside Wealth newsletter with Robert Frank, a weekly guide to high-net-worth investors and consumers. become a member to receive future editions straight to your inbox.

The proposed California billionaire tax includes a special provision that makes it extremely unlikely that anyone who wants to leave the state will avoid paying taxes, according to tax lawyers.

The Billionaire Tax Act, which could be placed on the state’s general election 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. Although new taxes typically take effect upon approval, the proposed billionaire tax would apply to California residents as of January 1, 2026. The retroactive date left little time for California’s estimated 200 to 250 billionaires to change their tax residency after learning of the potential tax in December.

“The reason they did this is clear,” said Christopher Manes of Manes Law. “If they had made the date in November, there would have been 200 people who could have gotten out in time after the transition and saved millions of dollars.”

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

But Nvidia CEO and California billionaire Jensen Huang he told Bloomberg “totally fine” with the proposed tax.

“I have to tell you, I haven’t even thought about it once,” Huang told Bloomberg. “We chose to live in Silicon Valley, and I guess whatever taxes they want to impose, so be it. I don’t see any harm in that.”

Service Employees International Union-United Healthcare Workers West, which supports the bill, said the proposed start date was to ensure billionaires “cannot evade responsibility by moving their assets elsewhere or claiming residence elsewhere.” They say the estimated $100 billion in revenue to be raised is aimed at offsetting health care cuts from Washington and “ensuring the rich pay their fair share.”

But lawyers say the aggressive timeline would likely invite legal challenges. And it underscores a growing problem for California tech founders and investors: How to plan for a quick move to a lower-tax state before a major liquidity event or company sale. With artificial intelligence fueling a new wave of wealth creation in California, with an estimated 50 new billionaires added last year, tax advisors in California said they were seeing a flood of new jobs even before the proposed wealth tax.

California’s rules regarding resident tax liability are complex. New York bases its residency rules on “domicile” and whether a person has stayed in the state for more than 183 days, while California uses a measure called the “proximal contact test.” The test uses a wide range of rules and measures to compare taxpayers’ connections to California and their new state, Manes said. Measures generally include residence, social and family contacts, assets and employment.

Changing residence or claiming non-residence for tax purposes may also trigger a second set of rules. For example, a taxpayer in California must not only purchase a home or sign a lease in another state, but also prove that he or she lives there through family photos, heirlooms, and other signs of actual primary residence. Whether it is a wealth tax or a liquidity event, the change of residence must occur before the taxable event.

“Intention is critical,” Manes said. “You must show that you intend to leave California indefinitely and permanently.”

Because a change of residence takes time to determine — often months — lawyers say it would be nearly impossible to successfully evade the proposed California wealth tax.

“Apparently the ship has sailed,” Manes said.

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

Advocates also say retroactivity has become a definite target for lawsuits. In addition to broader lawsuits claiming the tax is unconstitutional, taxpayers who left before November may argue that the retroactive date violates due process, attorneys say. While the Supreme Court has allowed some retroactive taxes when there is a “rational legislative purpose,” it is less likely to allow it if “an entirely new tax would be created,” lawyers say.

“I think the strongest legal objections will come from people who left the country before it became law,” said Jon Feldhammer, tax partner at Baker Botts.

Because of the strength of the legal argument, 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.

Because billionaires have large teams of lawyers, accountants, and logistics planners, they can act quickly and ensure that all requirements for a change of residence are met. They also often have homes in more than one place and can change their place of residence more easily, he said.

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