California voters appeared set to turn back Proposition 40, the state’s proposed billionaire wealth tax, in early returns Wednesday. For financial advisors, though, the planning questions the measure raised are unlikely to disappear with it.
The measure would impose a one-time state tax equal to 5 percent of net worth on billionaires who were California residents on January 1, 2026, with the tax due in 2027.
It was trailing 57% to 43% in early results Tuesday night reported by the Associated Press, though the outlet had not called the race by Wednesday morning as there were votes yet to be counted.
Two competing measures, which supporters of Proposition 40 have called "poison pills," add another complication. If more votes are cast for Proposition 41 or Prop 42 – which would require new tax programs in the state to be audited and prohibit new state taxes on personal property and financial assets, respectively – the billionaire tax would effectively be nullified.
But for Debra Taylor, managing partner and chief tax strategist at Carson Wealth, the debate had already reshaped client conversations well below the billion-dollar threshold.
“Prop 40 has moved residency from a footnote to a front-burner planning conversation,” Taylor said in an email interview with InvestmentNews. “Even clients nowhere near $1 billion are wondering how this policy may affect them.”
The uncertainty has been most acute among business owners, she said, as the question would materially shape where they live, where they base their company and where they hire. Clients in other high-tax states are watching for the same reason: they expect the debate to reach their own legislatures. Earlier this year, some RIAs in California were already drafting exit plans as the proposal gained traction.
“Our job as advisors is to keep those conversations grounded,” she said. “Relocating is a major personal and business decision, and it should rest on the full picture of taxes, family, business ties, and quality of life.”
She also cautioned against treating a move as an escape hatch. “It is also worth being clear with clients that a move today would not change their exposure to Prop 40, which looks back to who lived in California on January 1, 2026,” she said. “What a move can affect is how they are taxed going forward.”
Taylor said the paperwork linked to Proposition 40 would land far more widely than its tax. “The certification applies to every California resident who files a return, regardless of net worth, and it is signed under penalty of perjury,” she said.
“The measure also gives the state 10 years, rather than the usual four, to assess tax for 2026, and it is not yet clear whether that longer window applies only to billionaire filers or to everyone," she added. "At a minimum, I would tell California clients to keep their 2026 records well into the next decade.”
Some of the thorniest cases, she said, involve households whose wealth sits in private companies, startup equity and partnership interests. “Prop 40 sets a default formula for valuing private businesses, based on book value plus a multiple of average profits, and largely disallows the discounts that normally apply to minority or illiquid stakes,” she said. “That formula can produce a number well above what the business would actually sell for.”
The alternative to that is a certified appraisal, an option Taylor said is costly and would expose the appraiser to personal penalties. She also pointed to timing concerns around Proposition 40, as it would measure net worth on a single day – December 31, 2026 – and illiquid holdings can look very different a year later.
“Many of these households are asset-rich and cash-poor,” she added. “Selling those shares can also trigger federal and state capital gains tax, so a founder may need to sell even more stock to cover both the wealth tax and the income tax on the sale.”
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The push in California has been the boldest and biggest, as some progressive proponents have said it would be the first tax of its kind focusing on billionaires specifically. But whether it succeeds or fails, Taylor doesn't expect the idea of state-level wealth taxation to go away anytime soon.
“I expect the idea to keep surfacing, whatever happens in California,” Taylor said.
She pointed to the One Big Beautiful Bill Act, which the Congressional Budget Office has estimated will reduce federal Medicaid spending by $911 billion over a decade, and to new SNAP cost-sharing rules that shift expenses to states. “Every state will have to decide how to respond, whether by raising revenue, cutting spending, or narrowing eligibility,” she said.
While Prop 40’s backers presented it as that kind of fiscal response, opponents warned it would push mobile wealth out of the state. That kind of debate led to a split among California Democrats in the lead-up to the vote as Governor Gavin Newsom disclosed his income.
The state’s Legislative Analyst’s Office had projected tens of billions of dollars in temporary revenue spread over several years, alongside a possible ongoing decrease of less than $1 billion per year in income tax revenue from billionaires. Separately, a Stanford analysis found the tax may actually shrink state revenue.
Should Proposition 40 ultimately prevail at the polls, Taylor said any version of the resulting tax would likely face legal challenges over retroactivity and due process. She added that the international record on taxing wealth is mixed: out of 12 OECD countries that had an annual wealth tax in 1990, only Norway, Spain and Switzerland still levy an annual wealth tax in Europe.
While the results in the West Coast are still up in the air as of early Wednesday morning, Taylor is continuing to encourage advisors and their more affluent clients to not just wait and see, but to actively make preparations.
“For now, advisors should document residency for clients who have moved or plan to, keep current valuations on closely held businesses, stress-test liquidity for clients with concentrated private holdings, and revisit trust and gifting strategies while the current rules are known,” she said. “And of course, work closely with the client’s other advisors.”
She also urged clients to judge a state’s tax structure by how durable it is, not just by how tax-friendly it is based on today’s rates.
“How easily can taxes change by ballot initiative, and how heavily does the state rely on its top earners? What would the compliance burden be if the state enacted a version of Prop 40?” she said. “Then weigh what the state provides in return: its economy, talent pool, infrastructure, and quality of life.”
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