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The California Cliff
by Mark Ericsson
California, the state that takes
a backseat to no one, has
certainly taken a backseat
in the fiscal cliff debate.
While all eyes were glued to the TV
to watch the fight over how much
the federal tax would bite the rich,
California passed Proposition 30
which raised California’s top tax
rates nearly one and a half times as
great as our federal counterpart, and
we did it retroactively to the start of
2012.
Let’s look first at the rates we voted
in by way of the proposition. The
increases in California rates start
at lower levels than the federal increases.
For a single person, the top
rate for those with incomes under
one million dollars, formerly 9.3
percent, increases to 10.3 percent at
a taxable income of $250,000, 11.3
percent at $300,000 and 12.3 percent
at $500,000. The existing 1 percent
surcharge kicks in at $1,000,000 taxing
income in excess of $1,000,000
at 13.3 percent. For married couples,
the increases come at twice the income
levels as for the single taxpayer.
While the increase in the top
rate nationally was an increase of
13 percent over the 2012 rate, the increase
in California was 32 percent
over 2011, remembering the state
increase was retroactive.
For Californians with taxable incomes
over $250,000, the news in
California is not good. When you
add in the effects of the alternative
minimum tax, the ObamaCare investment
tax and California capital
gains policy, you can get some scary
results. The alternative minimum
tax was passed some 30 years ago
to prevent high-income taxpayers
from sheltering their incomes from
tax. To calculate the tax, you first
calculate your normal tax. You then
calculate the tax without the shelter
items to create a broader base
and apply a lower rate. You pay the
higher of the tax calculated by the
two methods.
One of the shelter items is state income
tax. You do not get to deduct
state income tax when calculating
your alternative minimum tax. Taxpayers
in states with high income
tax rates like New York and California
often get no tax benefit federally
from paying state tax. Therefore, the
two taxes are often additive. The
combined tax rate for a single person
with taxable income above $250,000
is 45.2 percent; above $300,000 it is
46.2 percent; above $400,000, it is
50.8 percent, above $500,000, it is
51.8 percent; and above $1,000,000,
it is 52.8 percent.
We then have the ObamaCare
investment tax of 3.8 percent on investment
income. All investment
income over $200,000 for individuals
and $250,000 for families is taxed
at 3.8 percent. If you sell your house
for a profit, you will certainly be
subject to this tax. A lot of income is
going to be taxed at 56.6 percent.
Most disruptive is that in California,
we don’t give any break for
capital gains. The theory is that the
California rates aren’t high enough
to drive taxpayers out of the state.
Thus someone with a capital gain
from the sale of property or a business
can incur a 12.3 percent rate on
gains above $500,000 in addition to
the 23.8 percent federal rate.
I have a client who is going to
sell his company for $150,000,000.
He has asked me for instruction
on how to cut his ties to this state.
With 13 percent of his capital gain
being taken by California, he sees
no advantage in living in this state
in a time where mobility is the big
new thing. He will pay no tax if he
moves to Nevada or Texas. The governor’s
balanced budget assumes
that no one is going to leave the
state. Multiply the $18,500,000 in
taxes the state is going to lose from
this one taxpayer by the hundreds
of others leaving and the budget
loses its glamour.
It is often noted that tax rates
were much higher during the prosperous
years of the Eisenhower administration.
However, society is
much more mobile now and work
forces are much more competitive.
Relocation is no longer a burden.
Not only does California have
America’s highest income tax rates,
California has the nation’s highest
sales tax rate, with counties that are
looking to the more profitable real
estate sectors to extract property tax
and cities that are increasingly enforcing
once lax gross receipts tax
ordinances.
One has to wonder why California
needs the most pervasive tax
regime by far of any state in the nation.
s
Mark Ericsson is a partner in the
tax and business firm of Youngman
& Ericsson, has served as the
2006 president of the Bar Association
and is currently the chair of
the Taxation Section. He has written
over 30 articles on tax and business
issues.
CONTRA COSTA COUNTY BAR ASSOCIATION CONTRA COSTA LAWYER 11