Add The California Post on Google When is a 5% tax not 5%? When imposed by a poorly drafted ballot measure.
California’s proposed wealth tax would already be the world’s highest wealth tax by a substantial margin –– but 5% could be a dramatic understatement.
Through a mix of aggressive valuation rules and careless drafting, the proposal would often yield effective rates well above that.
California’s tech industry is sounding the alarm over a provision that could tax founders based on their voting shares rather than their economic stake in the company they founded.
While the measure’s drafters have tried to assuage these worries, the concern is real. Whether or not drafters intended it, if founders hold private super-voting shares in their companies, they could be taxed based on the percentage of the company they control rather than the economic stake they hold.
Many tech founders could be forced to liquidate enormous shares of their company –– mass sell-offs that would roil markets –– to pay a tax that is many multiples of the ostensible 5% rate on their net worth.
Drafters say they intended this provision to apply only to voting stakes in non-traded companies, but under a straightforward reading, it applies to shares that are not traded on an exchange (like super-voting shares) even if the underlying company is publicly traded.
Drafters also say that if the law achieves this undesirable result, founders could pursue an alternative valuation.
Good luck with that. The tax will impose aggressive rules to police private certified appraisals, with punitive penalties for taxpayers and potentially ruinous penalties for appraisers if the state rejects their proposed alternative.
The proponents imposed a chilling effect on certified appraisals, but now insist that those appraisals offer sufficient recourse if the law accidentally imposes absurd levels of taxation on company founders by default.
But founders –– and tech employees, and everyone with investments in those companies –– are not the only taxpayers who could be in for a surprising tax bill. Through quirks of drafting, both marriage and divorce can be expensive propositions as well.
The wealth tax includes a marriage penalty, with a $1 billion threshold for both singles and couples. Due to aggressive residency rules that can capture taxpayers without a primary residence in California, it would not be unusual for one spouse to be considered a California resident for wealth tax purposes while the other is not.
In those cases, the wealth tax would apply to the nonresident spouse’s assets as well. One unfortunate way out of that bind: divorce. Till wealth tax do they part.
For others, divorce would create further complications. Anti-avoidance rules in the measure stipulate that debts to any person “related to the taxpayer” as of Jan. 1, 2026, do not reduce net worth.
If a billionaire couple divorced this year, debts that one owed to the other as part of a divorce settlement would not reduce taxable net worth, since the ex-spouse was a relative at the start of the year.
This is just one example of the peculiar effects of a complex new tax, unprecedented in the United States, pursued through a ballot initiative.
A larger example: The proposed tax’s residency standards are legally dubious and yield inequitable apportionment. A New Yorker with a second home in California could not only be deemed a resident for wealth tax purposes if he or she was in California for an extended period overlapping Jan. 1, 2026, but also, such individuals could be taxed on the entirety of their net worth, even if they spend most of the year in New York and earned most of their wealth there.
Petitions for reduced apportionment have stringent qualifications, and, among other things, are unavailable to those who spent more than a quarter of their time in California over the prior four years.
Whether by intention or sloppy drafting, these provisions make the proposed tax far more aggressive than advertised –– and exacerbate its harm to California’s economy.
Proponents are asking Californians to gamble on a first-in-the-nation wealth tax that would be the world’s highest (at a time when most countries are abandoning wealth taxes), the most aggressive (foreign wealth taxes have frequently exempted business assets), and riddled with drafting quirks that could make a bad tax even worse.
It’s going to be a lot more than 5%, and it’s going to hurt everyone — not just in California.
Jared Walczak is a visiting fellow with the California Tax Foundation, president of Walczak Policy Consulting and a senior fellow at the Washington, DC-based Tax Foundation, where he spent five years as vice president of state projects.
