By Liz Dunshee
A proposed California ballot initiative – “The 2026 Billionaire Tax Act” (also known as Initiative 25-0024) – has been getting a lot of attention, and it could have implications for business valuations, capital structures and other decisions in the coming year. Here are nine things to know:
- What would the proposed law do? If it gets onto the ballot and is approved by voters, the law would impose a one-time 5% tax on the “net worth” of billionaires who were California residents or part-year residents as of January 1, 2026, and certain trusts.
- How are business interests valued?
- This part is important. The “net worth” definition would include business interests – and for business entities other than public companies and sole proprietorships, valuation of (often illiquid) equity interests would be a complex exercise. The statute would require an extra calculation based on book value and earnings. A couple of things to note here:
- The value can’t be less than the valuation of any funding round or equity sale occurring within two years of the valuation date, unless there’s clear and convincing evidence that this would be an overstatement. In situations where more than one financing round or equity sale has occurred since December 31, 2024, it’s an open question whether this would mean the highest valuation within the past two years, even if it was followed by a down-round, or if the taxpayer would be able to use the more recent valuation in that situation.
- For founders who hold high-vote stock, their ownership percentage of the business will be presumed to be at least as much as their percentage of voting control (i.e., more than their actual economic interest). This could impact companies’ approach to multi-class share structures and the broader dynamics of founder-controlled companies.
- For publicly traded assets, the market trading value on the valuation date.
- This part is important. The “net worth” definition would include business interests – and for business entities other than public companies and sole proprietorships, valuation of (often illiquid) equity interests would be a complex exercise. The statute would require an extra calculation based on book value and earnings. A couple of things to note here:
- In general, how would the tax be calculated?
- At a high level, the initiative defines “net worth” to mean the total value of all assets and property interests of the taxpayer and their spouse worldwide, less debts and liabilities, as of December 31, 2026.
- In general, assets and interests disposed of before December 31, 2026 are excluded from “net worth” – but there are lookback exceptions for certain assets, which makes the applicable calculation less straightforward.
- The calculation would include property held in certain types of trusts but would exclude certain things like retirement account assets and deferred compensation, in certain circumstances and below certain amounts.
- The tax would be subject to a phase-out for individuals with a net worth less than $1.1 billion.
- In many cases, the tax would apply in full to part-year residents, with a possible reduction for situations where the person’s wealth was mainly accumulated outside of California.
- Individuals may be able to exclude directly held real estate and certain types of tangible property primarily located outside of the state.
- How could the initiative become law? Supporters – led by the Service Employees International Union – need to gather nearly 900,000 signatures to get it onto the November 2026 ballot, according to the California Secretary of State. It would then need to be approved by California voters. The governor would not have a veto right.
- How likely is it to get onto the ballot and pass? It’s too early to predict, but the California Legislative Analyst’s Office says that the proposal would likely decrease state income tax revenues in the long term, which may make some voters reluctant to support it.
- What do California leaders think? The initiative has drawn criticism from California Gov. Gavin Newsom (see this Politico article), the California Business Roundtable, the California Chamber of Commerce (see this statement), and several high-profile founders and investors.
- If it passes, would the law be upheld? If enacted, the tax would likely face legal and administrative challenges.
- How many people would be affected? The proponent estimates about 200 individuals would be subject to the tax.
- What are the long-term implications? Again, it’s too early to tell, but the mere existence of this ballot initiative has some founders considering whether the benefits of the California ecosystem outweigh the risks. This WSJ article reports on current sentiments.
As written, the proposal raises a lot of interpretive (and other) questions. We’ll be continuing to monitor the status of the ballot initiative and related matters.
