California's proposed billionaire tax contains a remarkable rule. A billionaire who loses $1 billion at a casino can reduce his billionaire-tax liability by $50 million. A billionaire who instead gives that same $1 billion to the American Red Cross may receive no reduction at all.
That creates a peculiar result. The billionaire can lose the property — but apparently cannot give it away.
An example: Brothers Bob and Tom are each hypothetical residents of California and each own $10 billion of assets that will be subject to California’s proposed billionaire wealth tax.
In August, Bob went to Las Vegas and lost $1 billion gambling in bona fide, arm’s-length casino wagers. Perhaps his only consolation was that his proposed California billionaire tax would decrease by $50 million.
Brother Tom gave $1 billion directly to the American Red Cross. Under the proposal, the gift does not reduce his billionaire-tax net worth. The initiative further provides that all receivables are included in net worth unless and until the FTB adopts regulations exempting particular categories. Accordingly, an income-tax refund receivable existing on December 31, 2026, as a result of a charitable deduction appears to be another asset in the billionaire-tax calculation.
Bob’s casino loss reduces his billionaire tax; Tom’s charitable gift may increase it. You cannot make this stuff up.
If the billionaire tax initiative passes on November 3, nonprofit charitable institutions may be among its biggest economic losers. The proposal provides that net worth includes property transferred for less than fair market value after October 15, 2025, if the property, considered alone or together with other substantially interchangeable transferred items, has a fair market value exceeding $1 million. Property transferred to certain trusts is excepted. On its face, the provision is broad enough to encompass a large outright charitable gift.
Thus, a large cash gift or transfer of substantially interchangeable securities after October 15, 2025 and on or before December 31, 2026 valuation date can remain in the donor's billionaire-tax net worth even though the donor no longer owns the property.
The result is that for philanthropic individuals subject to the full five percent billionaire tax, the billionaire tax includes a five percent California tax on philanthropy for charitable gifts made after October 15, 2025 and through December 31, 2026 by adding back charitable donations in calculating net worth. The donor gives away the property, but the property remains a part of his net worth calculation.
Billionaires do not have tens or hundreds of millions of dimes and quarters sitting in hampers in their laundry rooms. Even if paying over five years, almost all would need to sell assets to raise the cash to pay the tax. (Many taxpayers will have to choose between liquidating investments and borrowing against them. Either choice consumes financial resources that otherwise could have remained invested or been available for philanthropy. Regardless, borrowings need be repaid at some point with after-tax assets.)
Consider a taxpayer worth exactly $1.1 billion, all in zero-basis appreciated stock. His billionaire tax is $55 million. If he elects five installments, the 7.5 percent nondeductible deferral charges total another $8.25 million as the liability declines over the five years of installments. To produce the resulting $63.25 million after paying a 23.8 percent federal and 13.3 percent California tax on zero-basis stock sales, he must sell approximately $100.6 million of stock.
If the same $1.1 billion taxpayer first gives $100 million to charity, his actual assets fall to $1 billion — but the proposal still treats the transferred $100 million as part of his billionaire-tax net worth. Before considering any income- tax benefit from the charitable deduction, he therefore still faces the same $55 million billionaire tax. Any refund receivable generated by the charitable deduction may itself become an additional asset in the billionaire-tax calculation.
For a multi-billionaire subject to the full rate, the billionaire tax plus the five-year nondeductible deferral charges equal 5.75 percent of net worth. If the taxpayer must sell zero-basis stock subject to a combined 37.1 percent federal and California tax to make those payments, approximately 9.1 percent of beginning net worth must be liquidated — nearly twice the initiative's advertised five percent tax rate.
This author reasonably believes that the initiative will likely reduce charitable contributions from 2026 through 2031 by billionaires because they will be focused on raising the funds to pay the billionaire tax. A 9.1 percent impact to net worth will certainly make a philanthropist think twice about raising more funds to make charitable contributions.
There may also be a substitution effect that cannot be found in any revenue estimate. In conversations with several billionaires potentially affected by the initiative, I have heard a remarkably consistent reaction. They expect to regard the billionaire tax as, in effect, their state- mandated charitable contribution. California, rather than the donor, will select the beneficiaries. Because most of the money is earmarked for healthcare and other social purposes, they do not necessarily regard those purposes as unworthy. But several have told me that they expect to sharply curtail — or virtually cease — their private philanthropy until their billionaire-tax obligation has been paid.
These conversations obviously do not establish how every billionaire will behave. But they illustrate an economic point the initiative's revenue calculation does not capture: the government and private charities will be competing for the same dollars. A dollar used to pay Proposition 40 — and the taxes and financing costs required to raise that dollar — is a dollar that cannot simultaneously go to a hospital, university, church, museum or other charity.
The initiative contains a potentially important — but peculiar — exception for a ‘tax-exempt trust,’ defined as a trust exempt from federal income tax under Section 501. Thus, the initiative does not appear to contain a general exception for charitable giving. Instead, the treatment can depend on the legal form of the recipient or charitable vehicle. A conventional charitable remainder trust, for example, is generally exempt under Section 664 rather than Section 501 and therefore does not appear to satisfy the initiative's literal definition.
The upshot: the trust provision may create planning opportunities for some billionaires willing to construct a qualifying charitable vehicle. But it is no substitute for a general exception for charitable giving, and it does nothing to protect the ordinary outright gift — the billionaire deciding, this fall, simply to write a check to the Red Cross.
The initiative’s treatment of charitable giving is particularly notable in light of a recent working paper by Jasper Boll, Emmanuel Saez and Gabriel Zucman where they discuss $17.4 billion of appreciated-stock gifts made by a small group of California billionaires to foundations and donor-advised funds between 2019 and 2025. They identify those gifts as one reason taxable income and California income taxes were low relative to their measure of economic income. The paper does not suggest that the gifts were illegal or that the donors did anything improper. But its discussion emphasizes the tax benefits associated with the gifts rather than the $17.4 billion of assets transferred from the donors to charitable organizations.
And all of this gets to the interesting question: who ultimately pays the proposed California billionaire tax?
First, it can be a poor financial decision for a billionaire to make a significant charitable gift in 2026 when the gift itself remains in the billionaire-tax base and any resulting income-tax refund receivable may become an additional taxable asset. A donor able to make the identical gift in January 2027 instead has a powerful financial incentive to wait. Second, a taxpayer electing installments then faces four more years of billionaire-tax payments accompanied by nondeductible 7.5 percent deferral charges. Will taxpayers continue their usual philanthropy while making those payments? Some certainly will. But, as the billionaires I have spoken with indicate, some — perhaps many — will not.
Finally, the billionaire tax, the nondeductible deferral charges and any income taxes incurred in liquidating appreciated assets to make those payments will reduce the billionaire's net worth. That reduction will ultimately affect philanthropy at death as well.
In many charitable estate plans, the residuary clause provides that, after specific bequests, expenses, taxes and liabilities have been paid, “the remainder” goes to a university, hospital, church, foundation or other charity.
The proposed initiative changes that remainder. The billionaire tax comes out first. So do the nondeductible deferral charges. And, where appreciated assets must be sold to raise the cash, so do the income taxes generated by those sales.
California will receive its money before the charity receives its first dollar of the residue.
The proponents call the proposal a tax on billionaires. In many cases, at least part of its economic burden may ultimately be borne by organizations that never appear on a billionaire list: California's charities.