New Hoover Paper Argues That California's 2026 Billionaire Tax Act Is Unconstitutional

Hoover Institution (Stanford, CA) - California's proposed 2026 Billionaire Tax Act (BTA) will face serious legal challenges if approved by voters in November, a new essay from Hoover Institution scholars contends, because it exceeds the limits of California's taxation powers under multiple provisions of the US Constitution.

The measure, which will appear before voters as Proposition 40 in November, would impose a 5 percent tax on the assets of the state's billionaires. Supporters describe it as a way to raise revenue from California's richest residents. The paper's authors focus on whether the tax can survive constitutional scrutiny.

In the new paper, Joshua D. Rauh, Hoover's George P. Shultz Senior Fellow in Economics at Hoover, Aharon J. Friedman, a visiting scholar at Hoover, and Benjamin Jaros, a research fellow at Hoover, argue that the new measure, if passed, would run against a number of long-established principles under the US Constitution.

As Friedman described, "The BTA contains serious legal vulnerabilities under the Constitution, and not just under the Due Process and Commerce Clauses under which state tax provisions are often litigated. The BTA's targeting of specific individuals, including its purporting to prohibit Congress from allowing a federal income tax deduction for BTA tax liability, also raises concerns under the Takings Clause and the prohibition against Bills of Attainder."

The paper identifies the lack of connection between the wealth being taxed and California's jurisdiction over it as a fundamental Constitutional flaw of the BTA. Taxing a person's worldwide wealth as measured on December 31, 2026, based on the person's residence in California as determined on a single day, January 1, 2026, violates the Constitution's protections of Due Process. The tax applies regardless of whether the wealth is located in California or whether the wealth was generated while the person was a California resident.

The BTA's valuation rules are also a source of major legal vulnerability under the Due Process Clause. Much of the wealth the measure targets sits in illiquid holdings, including stakes in private companies and venture-backed firms. The BTA contains a number of provisions that would artificially inflate the value of certain assets, and especially these types of illiquid assets, as shown by research cited by the authors. The paper also argues that the retroactive January 1 residency date would violate the Due Process Clause of the Constitution because the BTA is a "wholly new tax" as the BTA itself stresses.

The paper places the measure within a broader ongoing national debate over taxation, including wealth taxation, and spending redistribution. The authors draw on their earlier work, including a Wealth Tax Primer published in February 2026, to explain how wealth taxes function and where they tend to fail. They also engage with analysis from supporters of the measure, including an expert report prepared by Brian Galle and colleagues that assessed the revenue, economic, and constitutional dimensions of Proposition 40.

In addition to the Due Process clause, the authors contend, the BTA violates multiple other parts of the Constitution, including the dormant Commerce Clause, the foreign Commerce Clause, and the Takings Clause, along with the prohibition against Bills of Attainder.

The authors argue that the constitutional defects are so severe that the BTA will be struck down under the Constitution. The flaws are not just technical details but structural problems that go to the heart of what and whom a state may tax. They say that the proposal has become a test case for whether jurisdictions across the US can tax wealth.

The authors, citing an earlier research paper, caution that a new wealth tax against the individuals constituting a large portion of the California's income tax base and will deliver far less than its supporters promise. Litigation could delay collection for years. Revenue projections that assume smooth implementation may prove optimistic if courts strike down key provisions or if wealthy residents successfully relocated before the residency date of the tax.

Friedman stated, "Even if the BTA is not struck down on its face, enactment will likely lead to protracted litigation over issues such as asset valuation and residency, especially because of the unique one-day residency testing rule."

This latest work follows earlier analysis on Proposition 40 that found it would likely cost the state tax revenue in the long run if passed, and other work that indicated the policy justification for such a measure was based on unfounded assertions about the nature of federal support for the state.

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