California’s 2026 SALT Debate Should Focus on Predictability

California enters Gov. Gavin Newsom’s (D) final year with a familiar temptation to reach for tax headlines. The nonpartisan Legislative Analyst’s Office projected a roughly $18 billion operating deficit for fiscal year 2026–2027, while Newsom’s Jan. 9 budget proposal projected a $2.9 billion deficit.

In that environment, businesses should treat state and local tax, or SALT, deduction conversations as a practical risk signal, not a cable-news segment.

Expect political theater. California’s signature-gathering ballot initiative would impose a one-time 5% excise tax on individuals with a net worth of $1 billion or more for tax year 2026. The opposition includes Newsom himself. The politics will get loud because the stakes run beyond Sacramento—many elected officials want a national platform, and many donors wish to leverage it.

California lawmakers have contemplated variations of “tax the rich” proposals for years, and this round will likely follow the same pattern: intense headlines, heavy lobbying, and a high probability that legislators won’t enact a sweeping new wealth tax system. Wealthy donors and interest groups can also threaten to withdraw financial support from members who back the measure.

Against that backdrop, politicians of every stripe keep pointing at the federal government’s roughly $38 trillion national debt to argue that someone should pay more.

Wealth tax supporters often present a simple story: Billionaires are the problem. The rhetoric can escalate into national messaging, including claims that the federal government has been hijacked and that taxing the rich can solve the deficit—just as proponents argue California addressed prior budget gaps.

Businesses don’t need to pick a side to feel the impact. They just need to plan for uncertainty and avoid letting politics drive compliance decisions.

Californians’ Hard Ceiling

Congress recently rewrote the SALT cap again. Under the tax-and-spending package passed last July, the cap is $40,000 for 2025, increasing by 1% per year through 2029. The cap phases down for higher-income taxpayers and reverts to $10,000 in 2030.

That headline can create a false sense of comfort for many California owners and executives, because the phase-down can push higher earners back toward the same practical limitation that drove the SALT fight in the first place.

That dynamic keeps state-level workarounds relevant. IRS Notice 2020-75 provides that certain state and local income taxes imposed on and paid by partnerships and S corporations at the entity level generally remain deductible by the entity in computing its taxable income. This mitigates the mechanics of the individual SALT cap that applies when an owner pays state tax directly.

Existing SALT Tool

California doesn’t need to invent a new SALT workaround. It already operates a passthrough entity elective tax that many partnerships and S corporations use as part of SALT planning. California extended that elective tax for taxable years beginning on or after Jan. 1, 2026, and before Jan. 1, 2031, which practically means tax years 2026 through 2030.

Businesses shouldn’t assume the election always helps or that it stays simple across multistate operations. They should consider that it will remain central to California SALT planning as long as Congress maintains a meaningful cap.

Lawmakers will keep using tax conformity as a lever. Newsom signed SB 711 in October 2025, moving California’s Internal Revenue Code conformity date forward to Jan. 1, 2025, for many provisions. Conformity changes don’t sound like SALT, but they can shift taxable income, timing, and credits—altering the real, after-tax cost of operating in California.

New England-Style Surtax

Massachusetts provides the proof point driving this conversation. Voters approved a 4% surtax on taxable income above an inflation-adjusted threshold, which reached $1,083,150 for 2025.

Massachusetts’ Department of Revenue estimated that FY2024 surtax revenue totaled nearly $2.2 billion, reinforcing why other states view the millionaire surtax model as a serious revenue tool. Rhode Island is considering a 3% surtax proposal aimed at high earners, with legislators debating where the “rich” line should be drawn.

California doesn’t start from the same baseline. Its personal income tax brackets top out at 12.3%, and the state adds a separate 1% mental health services tax on taxable income over $1 million, which produces a 13.3% marginal rate above $1 million before any new surtax.

A New England-style surtax could raise money in California, but it carries more downside risk because it already relies heavily on high-income taxpayers and volatile capital gains.

That explains why the one-time wealth tax proposal has ignited a political fight that reads more like a national proxy battle than a budget tool. The initiative describes a one-time 5% excise tax for tax year 2026 on individuals meeting the measure’s billionaire threshold, using valuation and timing rules set out in the initiative itself.

Whatever voters ultimately do, businesses should treat the debate as a signal that California will continue searching for revenue and that SALT planning will remain intertwined with broader state tax policy choices.

Preparing for Volatility

Businesses can’t control Sacramento, but they can control readiness. They should:

• Build a multiyear SALT model spanning 2025 through 2030 that reflects current federal cap mechanics, including the phase-down and the scheduled reversion to $10,000 in 2030.
• Evaluate California’s passthrough entity election early enough to avoid rushed, error-prone decisions, and document the analysis like you expect an auditor to read it.
• Treat SALT planning like a compliance project, not a political statement. When budgets tighten, scrutiny rarely loosens. If a business inflates deductions, hides income, or backdates documentation to chase a tax benefit, it can turn a policy issue into a criminal tax exposure.
• The immediate job is to run the numbers under both federal and California state rules, document the election analysis, and triage clients whose facts create civil fraud or criminal tax exposure risk before anyone “explains” a mismatch in writing.

California will debate SALT, surtaxes, and wealth taxes all year. Businesses should respond with predictability—model, document, and avoid needless risk.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

David Klasing is founder and managing partner of the Tax Law Offices of David W. Klasing in Irvine, Calif.

Awais Arshad contributed to this article.

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