The 2026 Billionaire Tax Act Part Two: Rate, Reporting, and Payment

Welcome to part two of this series on Proposition 40, “The 2026 Billionaire Tax Act.”[1] This article discusses the tax rate and how taxpayers can pay the amount due under Proposition 40. The rate is 5% except for trusts, individuals with a net worth below $1.1 billion (but above $1 billion), which is graduated to 5%. There are three ways to pay:

1. A lump sum.
2. An installment plan of five years with a 7.5% fee.
3. An “Optional Deferral Account” which delays payment until assets are sold.

There are associated reporting obligations. For most people, this will be a box to tick, while for others it will be a full disclosure of their net worth, together with appraisals.

Rate

“[T]he tax imposed is 5 percent of the net worth of such individual or trust,” except that “[i]n the case of an individual (other than a trust),” the tax rate would decrease by “0.1 percentage point (but not below zero) for each $2 million” below $1.1 billion in an individual’s net worth.[2] Thus, the tax rises from 0% to 5% for individual (not trust) net worths from $1 billion to $1.1 billion, increasing by 0.1% point for each $2 million interval. Moreover, the entire net worth of an applicable trust is subject to the full 5% tax even if the net worth is less than $1 billion.

Reporting

Each “California resident individual” required to file a California income tax return or an “applicable individual” would need to “[a]t the time a return is filed” for the 2026 tax year either:[3]

• Declare that their net assets were less than or equal to $1 billion as of December 31, 2026.[4]
• “Submit a declaration of the amount of any additional tax that is owed” under the 2026 Billionaire Tax Act, “together with any required appraisals or other evidence of fair market value,” and “any forms created by the Franchise Tax Board for calculating any additional tax owed under.”[5]

Furthermore, each “taxpayer” of the Proposition 40 tax must report all of the following:[6]

• “The percentage of the business entity owned by the taxpayer.”[7]
• “The book value of the business entity as of the end of the tax year, determined according to generally accepted accounting principles.”[8]
• “The book profits of the business entity in the tax year according to generally accepted accounting principles.”[9]
  • For the purposes of this particular reporting requirement, “‘the tax year’ of the business entity means the latest tax year of the business entity ending within or with the tax year of the taxpayer.”[10]

If the taxpayer lacks information regarding such a business entity’s book value or book profits, “and also lacks the right to obtain that information, the taxpayer must submit a certified appraisal of all of the taxpayer’s interests in the business entity.”[11] A sole proprietorship’s assets would be treated and reported as the individual’s assets.[12] Any certified appraisal made for the purposes of the 2026 Billionaire Tax Act would need to be submitted to the FTB by the appraiser, along with information identifying the pertinent taxpayer.[13] The 2026 Billionaire Tax Act would borrow the requirements for a qualified appraiser and a qualified appraisal from the IRS regulations.[14]

Payment

The tax would be due at the same time as the income tax.[15] The tax may be paid in three ways:

• A lump sum “along with any income tax owed for the 2026 tax year.”[16]
• “[A]nnually in five equal installments commencing in the year the tax is due with each subsequent annual installment payment also being subject to an annual nondeductible deferral charge of 7.5 percent of the remaining unpaid balance.”[17]
• An “optional deferral account” (ODA) in cases whereby Proposition 40’s tax liability would be in “excess of the combined total value of all of the individual’s publicly traded assets.”[18] In effect, an ODA functions as a sort of receivership or trust policing the relationship between the taxpayer and their illiquid assets, generally taxing 5% of distributions in addition to the income tax:
  • An ODA is a contract that “shall be legally binding on the taxpayer, and also on the taxpayer’s estate and assigns, until” the tax liability is fully paid.[19] This obliges the taxpayer to:
    • File all required forms regarding the ODA regardless of residency.[20]
      • “Failure to make annual reports and file any required forms shall be treated as a breach of contract and shall also be subject to the same penalties as a failure to file income tax forms for California residents who are required to file income tax forms.”[21]
    • “Reconcile and pay all tax liabilities that may arise as a result of the ODA.”[22]
    • Submit to California’s personal jurisdiction regarding the ODA.[23]
  • “A taxpayer may maintain only one ODA.”[24]
  • The ODA may attach to assets only to the extent that the wealth tax liability exceeds the taxpayer’s total sum of publicly traded assets.[25]
  • “[A]ny material distribution transactions made with regard to the ODA” must be annually reported.[26]
    • This generally includes any “withdrawal of money, property, or other value from” ODA assets and any “transaction with the taxpayer, or a related person to the taxpayer, that has the effect of transferring any assets or value of assets to which an ODA is attached without also transferring the ODA obligations.”[27]
    • However, this excludes “ordinary and necessary transactions for maintaining or increasing the value of assets to which an ODA is attached and that would not have the effect of distributing any profits, dividends, or other payments to owners for the use of capital, or similar transfers.”[28]
    • The FTB would be empowered and charged with the responsibility for specifying what transactions are and are not material distribution transactions.[29]
  • Material distribution transactions would be taxed at 5% (in addition to the income tax).[30]
  • An ODA could only be closed by taxing all remaining ODA assets at 5%.[31]

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[1] Nothing should be construed as support of or opposition to Proposition 40 by the author or The Burton Law Firm. 

[2] Proposed RTC § 50301(b).

[3] Proposed RTC § 50301(d).

[4] Proposed RTC § 50301(d)(1)(referencing the “valuation date” which is December 31, 2026, pursuant to proposed RTC § 50308(o)).

[5] Proposed RTC § 50301(d)(2).

[6] Proposed RTC § 50303(c)(3)(A). The term “taxpayer” is undefined for these purposes. However, its plain meaning would limit its applicability to persons actually liable for taxes under Proposition 40.

[7] Proposed RTC § 50303(c)(3)(A)(i).

[8] Proposed RTC § 50303(c)(3)(A)(ii).

[9] Proposed RTC § 50303(c)(3)(A)(iii).

[10] Proposed RTC § 50303(c)(3)(A)(iii).

[11] Proposed RTC § 50303(c)(3)(B).

[12] Proposed RTC § 50303(c)(2).

[13] Proposed RTC § 50305(a). Ignorance does not necessarily seem to excuse the appraiser’s duty. It is possible that an appraiser may be required to affirmatively inquire.

[14] Proposed RTC § 50305(b).

[15] Proposed RTC § 50301(c). This would be April 15, 2027, a Thursday. However, an official disaster proclamation may delay its due date. RTC § 18572.

[16] Proposed RTC § 50301(c).

[17] Proposed RTC § 50301(c).

[18] Proposed RTC §§  50301(b) & 50304(a).

[19] Proposed RTC § 50304(b).

[20] Proposed RTC §§ 50304(a)(1) & 50304(d).

[21] Proposed RTC § 50304(d).

[22] Proposed RTC § 50304(a)(2).

[23] Proposed RTC § 50304(a)(3).

[24] Proposed RTC § 50304(c).

[25] Proposed RTC § 50304(c).

[26] Proposed RTC § 50304(d).

[27] Proposed RTC § 50304(f).

[28] Proposed RTC § 50304(g).

[29] Proposed RTC § 50304(h).

[30] Proposed RTC §§ 50304(e) & 50304(i).

[31] Proposed RTC § 50304(l).