The Economic Treachery Masquerading As California’s Fiscal Policy

As the November election draws near, California’s Prop 40 — the “Billionaire Tax Act” designed to confiscate 5% of the wealth of any billionaire living in the state on January 1 of this year — is coming down to the wire. Some voters appear leery of its revenue promises and the economic cost of driving job creators out of the state.

But if the Act passes, that won’t be the end of the story. Multiple constitutional questions and potential legal battles will still stand in its way. Here are several.

First, the Billionaire Tax Act applies retroactively to individuals living in California on January 1, even though the vote won’t be until November and measures wealth as of December 31. This back-in-time order of things was designed to prevent billionaires from leaving ahead of the deadline. (Though it didn’t stop Google co-founders Sergey Brin and Larry Page, venture capitalist Peter Thiel, filmmaker Steven Spielberg and a handful of others from pulling up stakes.)

Is such retroactivity legal? Consider the Constitution’s due process clause. The 14th Amendment states: “No State shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any State deprive any person of life, liberty, or property, without due process of law.”

It is hard to reconcile due process with retroactively applying an unprecedented law that did not even exist during the applicable time period against a subset of citizens.

Courts have tolerated retroactive adjustments to certain established taxes before. But in a more relevant precedent — 1998’s Eastern Enterprises v. Apfel — the U.S. Supreme Court deemed that kind of after-the-fact monetary obligation “a severe, disproportionate, and extremely retroactive burden” and a violation of the takings clause. And the wealth tax would be a “wholly new tax.” The Billionaire Tax Act, in fact, goes to great lengths to stress that fact, in exempting itself from the California Constitution’s constraints on existing taxes.

More fundamentally, the act’s imposition of a novel tax on a person’s entire wealth, no matter its source or location, based on a one-day snapshot of California residency, violates both due process and the commerce clause. This creates several significant problems. It is nonsensical, for one thing. A billionaire might move to California for just one day and owe the tax, or he or she could move to the state on January 2 and owe nothing. A pauper who leaves California on January 2 and becomes rich by the end of 2026 in business-friendly Florida would still be taxed by California.

The U.S. Constitution allows states to tax the worldwide income of individuals physically residing in the state and using public services such as public safety and infrastructure. The Constitution does not allow a State to tax an individual’s entire wealth, regardless of any connection to the State, based on a single day’s residency.

From there, the list of constitutional concerns with the Billionaire Tax Act only goes on, as we detail in a new Hoover Institution paper. It includes likely violations of the foreign commerce clause (creating a risk of international double taxation and conflicts with federal foreign policy), the takings clause (seizing property in ways that disrupt settled investment expectations), and the prohibition on bills of attainder (explicitly targeting and punishing a politically disfavored group).

The act and its backers offer several hedges against these defects. But the

act’s state reapportionment and tax credit provisions, as well as its presumptions about what private businesses are worth, are dramatically skewed against taxpayers. For example, taxpayers have the ill-defined burden of proposing a “more fair and reasonable method that is practicable to administer.” Companies are presumed to be worth at least as much as the previous round of private funding implied, and although this is often not the case, each taxpayer bears the burden of demonstrating it.

The irony is that if voters reject the Billionaire Tax Act, California’s tax revenue will be healthier. Previous research from our team at the Hoover Institution shows that enacting the act would decrease California’s revenue because the billionaires who make up a major portion of California’s income tax base would simply leave the state. And that doesn’t account for the economic activity they’ll take with them.

But based on the Act’s provisions and its drafters’ statements, increasing California’s revenue isn’t even the primary motivation. Taken together, the Billionaire Tax Act’s provisions point to something else: an attempt to impose economic harm on certain wealthy taxpayers, reduce their influence, or even intentionally drive them out of California. It is unconstitutional on its face and should be struck down in court if voters pass it, which is one more reason, if another were needed, why they should not.

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Joshua Rauh is the George P. Shultz Senior Fellow in Economics at the Hoover Institution, where Aharon Friedman is a Visiting Scholar. They are the author of “The 2026 Billionaire Act and the Constitution,” with Benjamin Jaros.