If voters approve Proposition 40, the wealth tax measure’s implementation could disrupt state tax administration and trigger years of high-stakes litigation, according to three tax experts who examined the measure during a recent webinar hosted by the California Tax Foundation.
Tax attorneys Marty Dakessian of Dakessian Law Ltd., Saba Shatara of Reed Smith, and Joseph Bishop-Henchman, executive vice president of the National Taxpayers Union Foundation, evaluated the legal, constitutional, and administrative hurdles surrounding the wealth tax initiative.
One of the most pressing issues is how quickly the proposal would enter the court system. Proposition 40 establishes a special procedure for facial challenges, creating an expedited legal path immediately following voter approval.
“The drafters wanted to settle the questions once and for all as to whether or not Prop 40 is facially invalid, so that down the road, they don’t have a sweeping lawsuit that strikes it down five years later,” Dakessian said.
This framework suggests the initiative was structured with immediate court battles directly in mind.
The measure’s retroactive residency provision presents a major area of concern, the panelists said. Proposition 40 evaluates residency status as of January 1, 2026, roughly four months before the proponents turned in signatures to qualify the measure for the ballot, and more than 10 months before it went to the voters.
“The way that the retroactivity is really phrased, it’s about residency as of a certain date,” Shatara said, adding that this creates significant uncertainty over the state’s jurisdiction.
Residency audits represent some of California’s most contentious tax disputes, and tying massive tax liabilities to a single point in time will escalate those conflicts, the panelists agreed.
Also, taxing worldwide wealth based on residency would push established legal boundaries. Much of an individual’s net worth could stem from out-of-state investments, businesses, and intellectual property.
“The idea that you’re applying residency as a mechanism to assert nexus over the entire corpus of somebody’s wealth completely ignores where that wealth is created,” Shatara noted.
Questions regarding interstate commerce and asset apportionment will form the core of constitutional challenges, according to the panelists.
Valuation represents the primary practical hurdle for both taxpayers and the Franchise Tax Board. Proposition 40 mandates assigning precise values to privately held businesses, partnership shares, and nonpublic assets that lack established market prices.
Bishop-Henchman emphasized that the proposal understates this reality.
“It’s almost as if the initiative assumes that there is a right answer on valuation,” Bishop-Henchman said.
Because financial experts regularly arrive at wildly different valuations for identical closely held assets, disputes are unavoidable, he added.
This burden is compounded by strict penalties targeting valuation professionals. Proposition 40 holds appraisers liable if a valuation is deemed understated. Shatara described the provision as having “a meaningful chilling effect” on professionals, adding that key valuation firms already are hesitant to accept this work due to potential financial exposure. Taxpayers would be required to submit certified appraisals while the law deters qualified experts from issuing them, he said.
From an operational standpoint, California lacks the specialized staff and technology needed to enforce a wealth tax, the panelists said. The state would have to recruit valuation specialists and design an audit framework capable of handling complex appraisals. Shatara cautioned that “it’s going to require resources that they don’t currently have,” and a 10-year assessment period would prolong audit disputes for a decade after filing.
Beyond individual enforcement actions, the measure alters administrative standards by bypassing typical rulemaking processes and giving tax authorities unusually broad oversight.
Dakessian characterized the initiative’s mix of procedures and penalties as being akin to “an anti-taxpayer greatest hits album.”
“Most of the countries that have tried a wealth tax have moved away from it,” Bishop-Henchman noted.
The California Tax Foundation’s next webinar, “Digital Infrastructure: Tax Policy in the Digital Age,” will be presented October 27 at 9 a.m., featuring Michele Borens (partner, Eversheds Sutherland), Lindsay McAfee (tax principal, Deloitte), and Jared Walczak (visiting fellow, California Tax Foundation). California MCLE and CPE credits are available for participants. Click here to register.