For Immediate Release, August 18, 2026
Contact: Jared Walczak, [email protected]
SACRAMENTO – Proposition 40, the California initiative proposing a 5 percent one-time tax on the worldwide net worth of California residents based on a snapshot residency date of January 1, 2026, presents major legal and administrative challenges – some caused by drafting errors and oversights – according to research published today by the California Tax Foundation.
“The measure’s valuation, residency, and apportionment rules are constitutionally unsound and its implementation timeline is unrealistic,” Jared Walczak, author of the new white paper and a visiting fellow with the California Tax Foundation, said. “The only certainty, should voters adopt the new tax, is that California will face years of costly litigation that it may well lose, and if the loss comes after revenue has been collected, the resulting refunds – with interest – could precipitate a budget crisis.”
Walczak will present his findings today at 9 a.m. in a briefing hosted by the California Taxpayers Association. Click here to register for the online event.
The white paper, “Proposition 40’s Greatest Challenges Would Begin After Election Day,” notes that the measure would be the first wealth tax ever adopted by a U.S. state.
“Any attempt to levy a state-level wealth tax would raise serious constitutional questions, create substantial economic risk, and add significant complexity to the tax code,” the white paper states. “But Proposition 40 is remarkable for the breadth of its legal and administrative shortcomings. The tax’s nexus, apportionment, and valuation rules are all deeply flawed and constitutionally unsound. Drafting errors yield outlandish results that proponents never intended, while other provisions, possibly drafted with greater intent, extend the tax far beyond what is commonly understood. And the drafters failed to account for many scenarios, designing a tax that cannot easily survive contact with the real world.”
Among the problems with Proposition 40 described in detail in Walczak’s research:
- The initiative’s default formula for private business valuations systematically overstates net worth, measures ownership by voting control rather than economic interest, and fully taxes mutually exclusive conditional profit interests.
- Proposition 40 imposes the tax based on residency as of a single day, then taxes 100 percent of worldwide net worth a year later, without apportionment for time spent elsewhere and without exclusion of wealth accrued post-departure.
- The tax imposes a substantial marriage penalty, and in cases of divorce, its provisions regarding transfers to related parties would tax assets the taxpayer no longer possesses because they were transferred in a divorce settlement.
- Proposition 40 potentially double-taxes foreign assets, with no applicable credit, raising significant constitutional concerns.
- The Franchise Tax Board would have only a few months between election certification and the tax filing deadline to hire and train staff, draft regulations, issue forms, and build out new administration and audit functions. Taxpayers would have limited time to value assets that have never been valued in trade, potentially before any valuation rules have been promulgated by the FTB.
- Facial challenges to the constitutionality of the tax must be filed within 60 days and resolved on an expedited basis in a single venue, before the FTB has interpreted the new law.
- The tax imposes costs on California regardless of whether it is upheld. Billionaires who leave in anticipation of the tax, or to preserve their ability to contest it, are unlikely to return, depriving the state of future revenue under existing taxes. (Walczak’s previous paper, “Ongoing State Tax Revenue Implications of the 2026 California Billionaire Tax Act,” found that Proposition 40 would reduce ongoing state tax revenue by $3.53 billion to $4.49 billion per year due to billionaire departures and their economic spillover effects.)
The California Tax Foundation, a nonprofit organization founded in 1980, improves public policy through independent, nonpartisan research.