A version of this article first appeared in CNBC’s Inside Wealth newsletter with Robert Frank, a weekly guide for wealthy investors and consumers. Register to receive future editions, straight to your inbox.
California’s proposed billionaires tax includes a special provision that makes it highly unlikely that anyone who wants to leave the state will be able to avoid paying, tax lawyers say.
The Billionaire Tax Act, which could be added to the state’s general election in November, would impose a one-time 5 percent tax on the total wealth of California tax residents with a net worth of $1 billion or more. Although new taxes generally take effect after approval, the proposed billionaires tax would apply to those who reside in California beginning January 1, 2026. The retroactive date left little time for the estimated 200 to 250 California billionaires to change their tax residency after learning of the potential tax in December.
“It’s obvious why they did this,” said Christopher Manes of Manes Law. “If they had set the date in November, after passage you would have 200 people who could get out on time and save millions of dollars.”
California tech billionaire Peter Thiel announced last week that he had “established a significant presence in Miami over the past several years, maintaining a personal residence in the city since 2020” and an office for his venture capital firm Founders Fund since 2021. Lawyers told CNBC that at least two other unnamed California billionaires have moved or are considering moving since late last year.
Nvidia CEO and California billionaire Jensen Huang, however, told Bloomberg that he was “completely on board” with the proposed tax.
“I have to tell you, I didn’t even think about it once,” Huang told Bloomberg. “We chose to live in Silicon Valley, and whatever taxes they would like to impose, so be it. That suits me just fine.”
The Service Employees International Union-United Healthcare Workers West, which supports the bill, said the proposed start date was intended to ensure that billionaires “cannot shirk their responsibilities by moving their assets or claiming residency elsewhere.” They say the $100 billion in revenue that would be raised would be aimed at offsetting Washington’s health care budget cuts and “ensuring the wealthy pay their fair share.”
Still, lawyers say the aggressive schedule will likely lead to legal challenges. And it highlights a growing question for founders and investors in California’s tech sector: how to plan for a quick move to a lower-tax state before a major liquidity event or business sale. With artificial intelligence driving a new wave of wealth creation in California — and the arrival of about 50 new billionaires last year — California tax advisers said they were seeing a flood of new business even before the proposed wealth tax.
California’s rules regarding tax residency are complex. While New York bases its residency rules on “domicile” and whether a person has been in the state for more than 183 days, California uses a measure called the “closest connection test.” According to Manes, the test uses a wide range of rules and measures to assess taxpayers’ ties to California versus their new home state. Measures generally include residence, social and family contacts, assets and work.
Changing residence or claiming non-residency for tax purposes can also trigger a second set of rules. A California taxpayer, for example, must not only buy a home or sign a lease in another state, but also prove they live there — using family photos, heirlooms and other signs of a true primary residence. A change of residence must occur before the taxable event, whether it is a wealth tax or liquidity event.
“Intent is everything,” Manes said. “You must show that you intend to leave California indefinitely and permanently.”
Because establishing a change of residency takes time — usually months — attorneys say it would be nearly impossible to evade California’s proposed wealth tax.
“By the looks of it, the ship has sailed,” Manes said.
Of course, it’s unclear whether California voters will approve the measure. Tax increases on the ballot in California have a mixed history, and Gov. Gavin Newsom is coordinating efforts to defeat the measure.
Lawyers also say the retroactive provision makes it a sure target for lawsuits. In addition to broader lawsuits claiming the tax is unconstitutional, taxpayers who leave before November could claim the retroactive date violates due process, attorneys say. Although the Supreme Court has allowed some retroactive taxes when there is a “rational legislative purpose,” it is less likely to allow it with “the creation of an entirely new tax,” lawyers say.
“I think the biggest legal challenges will come from people who leave before the bill passes,” said Jon Feldhammer, a tax partner at Baker Botts.
Because of the strength of the legal argument, Feldhammer said some wealthy Californians are considering leaving 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 logistical planners, they can mobilize quickly and ensure that all requirements are met to change residence. They also typically already have homes in multiple locations and can more easily change residences, he said.
“You’re talking about the most portable classroom in America,” Feldhammer said. “They have the means and the capacity to act very quickly.”