The California Billionaire Tax Act: Constitutional Limits On Implementation

Introduction

The California Billionaire Tax Act (the “BTA”) contains multiple constitutional defects built into its design. It implicates the Due Process Clause, the Dormant Commerce Clause, and other constitutional limits in ways that could lead a court to narrow or invalidate the initiative in whole or in part. These are not theoretical objections. They arise from the BTA’s core operating rules. If enacted, the BTA would begin not as a stable source of revenue, but in extensive litigation.

Retroactivity

The BTA imposes tax liability based on California residency as of January 1, 2026, even though the measure would not be enacted until after the November 2026 election. In practical terms, it attaches consequences to conduct that occurred before the law existed.

Courts have long distinguished between retroactive adjustments to existing taxes and the retroactive imposition of an entirely new tax. The Supreme Court has invalidated the latter in circumstances materially similar to those presented here. Untermyer v. Anderson, 276 U.S. 440 (1928); Blodgett v. Holden, 275 U.S. 142 (1927). More recent decisions continue to recognize that retroactive taxes raise due process concerns where they impose new and unexpected obligations. United States v. Carlton, 512 U.S. 26 (1994); United States v. Hemme, 476 U.S. 558 (1986).

That distinction is critical. The BTA is not a rate change or correction to an existing regime—it is a new tax. And it applies based on a residency status fixed months before enactment. Taxpayers would not have had a meaningful opportunity to anticipate or plan for that liability. Those are the core concerns that underpin constitutional limits on retroactive taxation. If a court finds them present here, they would provide a direct basis to invalidate the initiative at the threshold.

Taxing Out-of-State Wealth—Dormant Commerce Clause

The BTA generally taxes 100% of a taxpayer’s net worth, including wealth earned, held, or located outside California. That structure is difficult to reconcile under the Dormant Commerce Clause, which would provide grounds to invalidate the initiative.

Under Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977), a state tax must have a substantial nexus to the state and be fairly apportioned. The BTA’s reach to worldwide wealth—without regard to where that wealth was created or maintained—pushes beyond those limits.

The issue is particularly acute in common scenarios:

• wealth accumulated entirely outside California;
• taxpayers who recently moved to California; and
• taxpayers who leave the state during 2026.

In each case, the tax applies to assets with little connection to California. The initiative’s default rule—apportioning 100% of such wealth to California—amplifies the problem. Although the BTA allows taxpayers to seek alternative apportionment, it places a heavy burden on them to prove by “clear and convincing evidence” they are entitled to relief because the tax is “grossly disproportionate” and to propose a workable alternative. That structure attempts to shift to taxpayers the state’s burden to constitutionally apportion its tax. That defect is not incidental; it supplies an additional basis on which a court could strike the initiative in part or in full.

These are not edge cases. They are central to how the BTA computes the tax. If California cannot constitutionally tax worldwide wealth with so little connection to the state, the initiative’s core revenue assumptions on how much tax it can generate unravel.

Trusts and Minimum Contacts

The BTA’s application to trusts presents a separate and substantial due process defect.

The Supreme Court has made clear that a state may not tax trust property without a sufficient connection between the state and the trust. N.C. Dep’t of Revenue v. The Kimberley Rice Kaestner 1992 Family Trust, 588 U.S. 262 (2019). In Kaestner, the Court held that the in-state residence of a beneficiary—without a present right to income—was not enough to establish that connection.

The BTA goes further. It subjects trusts to tax based solely on the fact that a California resident transferred property to them, even where the trust is formed, governed, and administered entirely outside the state. Without meaningful control or connection to California, those provisions conflict with settled minimum-contacts principles and are vulnerable to invalidation. The BTA does not merely test the outer edge of those principles; it moves beyond them.

As a practical matter, these provisions are likely to generate substantial litigation not only from taxpayers but also from out-of-state trusts. They also raise the possibility of disputes involving other states challenging California’s authority, given the BTA’s attempt to reach entities formed and regulated under those states’ laws.

Other Bases for Constitutional Challenge

The BTA presents additional independent bases for challenge:

• Targeted taxation. The Act applies to a discrete and small group—approximately 200 individuals— supporting a bill-of-attainder challenge if a court views the measure as singling out a small group for punitive treatment.
• Right to travel. By fixing liability based on January 1 residency and taxing those who later leave the state, the BTA may operate as a burden on interstate movement, an effect that, if established, renders the provision unconstitutional under established right-to-travel principles. Shapiro v. Thompson, 394 U.S. 618 (1969).
• Vagueness. Key provisions turn on undefined standards—such as whether wealth was “substantially” connected to California or whether valuations “substantially” misstate value—leaving taxpayers without clear guidance and supporting a vagueness challenge based on lack of fair notice and the risk of inconsistent application.

Individually, each of these theories gives a court a separate route to narrow or invalidate the initiative. Collectively, they reinforce the larger point: the BTA is not a tax measure with one debatable flaw; it is a statute with multiple constitutional vulnerabilities embedded in its design.

Practical Consequences

These legal defects do not exist in isolation. They have direct implications for how—and whether—the BTA would operate. As the Legislative Analyst’s Office has observed, revenues from the BTA are already uncertain and depend on taxpayer behavior and market conditions. Layering substantial constitutional defects on top of that uncertainty makes disruption to the statute’s operation likely from the outset. Courts may narrow the initiative, delay its implementation, invalidate key provisions, or strike it down in its entirety. Even where the tax ultimately survives in some form, years of litigation are likely to shape its scope and timing.

Conclusion

Taken together, these are not isolated objections. They are multiple, independent defects in the BTA’s design. Substantial litigation over the initiative’s validity would be inevitable if enacted, and that litigation could narrow or invalidate the measure in significant part—or in full. The practical consequence is straightforward: the BTA may prove not to be a dependable revenue measure at all, but a prolonged constitutional fight over whether the tax can lawfully operate as promised.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.