Had it passed, experts believe it would have been the world's first wealth tax targeting billionaires.
The tax would have raised about $100bn to make up for federal funding cuts to healthcare in California as a result of President Donald Trump's sweeping tax and spending bill.
Those who backed the measure had argued it would help ensure that the ultra-wealthy were contributing their fair share and helping backfill gaps in the state's budget.
The wealth tax faced fierce opposition, including from Google co-founder Sergey Brin, as well as California Governor Gavin Newsom and labour unions.
Newsom, whose tenure as governor is coming to an end, had expressed concerns that the measure could cause the wealthy to leave the state and drive out their crucial income tax revenue.
Some billionaire critics of the measure spent millions trying to crush it, with a handful even moving out of the state to evade the possible tax. Brin gave more than $100m to a political organisation funding ballot measures that could block the tax, according to the Los Angeles Times.
Dave Regan, head of the union that led the charge for the measure, said on election night that the billionaires' efforts to block the tax created "a lot of confusion and a lot of second-guessing among people who really in their hearts know what the right the thing to do is".
Regan, who is president of Service Employees International Union-United Healthcare Workers West, pledged to seek a billionaire tax once more in 2028.
The measure had odds stacked against it, with two other propositions on the ballot that would have effectively reversed it, even if it passed.
California, home to some 23 million registered voters, has the largest economy in the country and boasts the fourth largest global economy. It is home to one of the highest concentrations of billionaires in the world, but also has one of the highest wealth gaps.