Will California Tax Man Let You Move States?

January 11, 2017 By Robert W. Wood Leave a Comment

As reported by Forbes.com:

California’s Proposition 55 extended–through 2030–the “temporary” 13.3% tax rate on California’s high-income earners. It applies to 1.5% of Californians, singles with an income of $263,000, or joint filers with incomes of $526,000. It is the highest marginal tax rate in the nation. And with anticipated cuts in federal taxes in 2017, California’s tax rates may look even higher. And for some people tax-free Nevada, Texas, Washington, and Florida will hold considerable allure.

But fear of being chased by California’s Franchise Tax Board can be real. Fortunately, there is a safe harbor for certain individuals leaving California under employment-related contracts. The safe harbor says that an individual domiciled in California, who is outside California under an employment-related contract for an uninterrupted period of at least 546 consecutive days, will be considered a nonresident unless either:

  1. The individual has intangible income exceeding $200,000 in any tax year during which the employment-related contract is in effect.
  2. The principal purpose of the absence from California is to avoid personal income tax.

The spouse of an individual covered by the safe harbor can qualify too. Return visits to California that do not exceed a total of 45 days during any tax year covered by the employment contract are considered temporary. …

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Californians Approve $5 Billion per Year in New Taxes

December 8, 2016 By Ed Ring 3 Comments

For the last few years, using data provided by the watchdog organization CalTax, we have summarized the results of local bond and tax proposals appearing on the California ballot. Nearly all of them are approved by voters, and this past November was no exception.

With only a couple of measures still too close to call, as can be seen, 94 percent of the 193 proposed local bonds passed, and 71 percent of the proposed local taxes passed. Two years ago, 81 percent of the local bond proposals passed, and 68 percent of the local tax proposals passed. No encouraging trend there.

Outcome of Local Bond and Tax Proposals – November 2016

outcome-of-local-bond-and-tax-proposals-november-2016

A simple extrapolation will provide the following estimate: Californians just increased their local tax burden by roughly $4 billion, in the form of $1.9 billion more in annual interest payments on new bond debt, and $2.1 billion more in annual interest on new local taxes. But that’s not even half the story.

California’s voters also supported state ballot initiatives to issue new bond debt and impose new taxes. Prop. 51 was approved, authorizing the issuance of $9 billion in new bonds for school construction. Prop. 55 extended until 2030 the “temporary” tax increase on personal incomes over $250,000 per year, and Prop. 56 increased the cigarette tax by $2 per pack. The cost to taxpayers to service the annual payments on $9 billion in new bond debt? Another $585 million per year. Even leaving “rich people” and smokers out of the equation, California voters saddled themselves with nearly $5 billion in new annual taxes.

But as they say on the late-night infomercials, there’s more, much more, because California’s state legislators don’t have to ask us anymore if they want to raise taxes. November 2016 will be remembered as the election when a precarious 1/3 minority held by GOP lawmakers was broken. California’s democratic lawmakers, nearly all of them controlled by public sector unions, now hold a two-thirds majority in both the state Assembly and the state Senate. This means they can raise taxes without asking for consent from the voters. If necessary, they can even override a gubernatorial veto.

And they will. Here’s why:

There are three unsustainable policies that are considered sacrosanct by California’s state lawmakers and the government unions who benefit from them. (1) They are proud to have California serve as a magnet for undocumented immigrants and welfare recipients. (2) They are determined to continue to overcompensate state and local government workers, especially with pensions that pay several times what private workers can expect from Social Security. (3) They have adopted an uncritical and extreme approach to resolving environmental challenges that has created artificial scarcity of land, energy and water, an asset bubble, and a neglected infrastructure that lacks the resiliency to withstand large scale natural disasters or civil emergencies.

All three of these policies are extremely expensive. “Urban geographer” Joel Kotkin, writing in the Orange County Register shortly after the Nov. 8 election, had this to say about these financially unsustainable policies:

“This social structure can only work as long as stock and asset prices continue to stay high, allowing the ultra-rich to remain beneficent. Once the inevitable corrections take place, the whole game will be exposed for what it is: a gigantic, phony system that benefits primarily the ruling oligarchs, along with their union and green allies. Only when this becomes clear to the voters, particularly the emerging Latino electorate, can things change. Only a dose of realism can restore competition, both between the parties and within them.”

Despite the increase in consumer confidence since the surprising victory of Donald Trump in the U.S. presidential election, the stock and asset bubble that has been engineered through thirty years of expanding credit and lowering rates of interest is going to pop. The following graphic, using data from Bloomberg, explains just how differently our economy is structured today compared to 1980 when this credit expansion began.

1980-vs-2016

As can be easily seen from their price/earnings ratios today, publicly traded stocks are grossly overvalued. Equally obvious is that interest rates have fallen as low as they can go. For more discussion on how this is going to affect the economy, refer to recent California Policy Center studies “How a Major Market Correction Will Affect Pension Systems, and How to Cope,” and “The Coming Public Pension Apocalypse, and What to Do About It.” Despite healthy new national optimism since Nov. 8th, the economic fundamentals have not changed.

California’s democratic supermajority legislators, and the government unions who control them, are going to have a lot of explaining to do when the bubble bursts. For decades they have successfully fed their unsustainable world view to the media and academia and the entertainment industry. For over a generation they have brainwashed California’s K-12 and college students into militantly endorsing their unsustainable world view. This year they conned California’s taxpayers into approving another $5 billion in new annual taxes. But the entire edifice exists on borrowed time.

Ed Ring is the vice president of research policy at the California Policy Center.

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California Continues Its March to the Left

November 10, 2016 By John Seiler 8 Comments

Atty. Gen. Kamala Harris urges funds for tracking prescription drugsOn Tuesday, California voters lurched even further to the political Left, bringing the state even more out of step with the rest of the country. In a battle of two Democrats for a U.S. Senate seat, Bay Area leftist Attorney General Kamala Harris trounced Orange County moderate Rep. Loretta Sanchez, two to one – a greater margin than the victory in the state of Hillary Clinton over Donald Trump.

The Senate election again showed the bankruptcy of the “Top Two” primary reform of 2010, Proposition 14, which was supposed to produce moderate victors. As in many other local races, this race mainly prevented voters from having alternatives on the ballot from the Republican Party and third parties.

On the 17 state initiatives, giddy voters overall imposed massively higher taxes, spending and regulations. Combined with the $15 per hour minimum wage passed earlier this year by the Legislature, California in the future is going to be a much more expensive and less pleasant place to live. The next recession, which could hit next year, again will zoom unemployment above the 10 percent level and rapidly empty the state treasury, despite – or, rather, because of – the tax increases.

The Proposition 55 tax “extension,” really a $7 billion tax increase, belies the promise in 2012 that Proposition 30’s tax increase was “temporary.” The real problem here is that Prop. 30 was supposed to cover state deficits during the economic recovery from the Great Recession. But there’s no recession in 2016 and no deficits. So taxes should have been allowed to subside to the previous level. What will be done in the next recession? Another $7 billion tax increase – “temporary,” of course? Then another? And another?

Indeed, Prop. 55 passed with more than 60 percent of the vote, which for state teachers’ unions and other tax obsessives is like putting catnip in front of a mountain lion.

The Proposition 56 tax increase of $2 a pack of cigarettes, as I warned in a previous article on this site, will gouge poor people almost exclusively. How many non-poor people do you know that smoke a pack a day? And it will ignite a massively bigger black market in smokes. All to fund special interests favored by hedge fund billionaire and perpetual Silicon Valley busybody Tom Steyer.

Proposition 58 also passed, bringing back the retched, illiterate-producing Bilingual Education. As I wrote here, it’s one of the biggest education scams ever. Asian parents make sure their kids don’t get near this educational malpractice. But Hispanic kids won’t learn English or Spanish well, keeping them behind other kids.

As to regulations, Proposition 63’s absurd new gun-control measures passed, bringing certain lawsuits by gun groups for violations of the Second Amendment “right to keep and bear arms.” Given that President Trump will be appointing pro-Second Amendment justices to the U.S. Supreme Court, the odds are that 63, and equally absurd gun controls passed by the Legislature earlier this year, will be overturned.

Like state officials in general, voters haven’t heard the proof that gun control only works on honest citizens; that criminals easily can get guns and ammo. Conversely, when honest citizens are armed, crime drops because criminals fear being shot by potential victims.

On the positive side, the drug companies successfully spent heavily to defeat Proposition 61’s price controls on prescription drugs. Even Bernie Sanders ads didn’t help any more than did his national backing of Hillary.

Although the death penalty again was upheld with the defeat of Proposition 62, as I pointed out here, no future governor will allow an execution, so the matter is mute – except to get cooperation from criminals too dumb to know they can’t be executed.

Proposition 57, criminal sentence reduction, passed with nearly two-thirds of the vote. That seems reasonable, but if crime keeps increasing, you can bet a tightening measure will be on the 2018 ballot. These things go in cycles. The 1990s saw Three Strikes imposed with Proposition 184 in 1994, which was too strict. Like the 1960s, now is a time of laxity. The pendulum probably will swing back the other way eventually.

Overall, the election will drive tens of thousands of productive people and thousands of businesses from the state to seek a better life in other states, or even countries, despite almost guaranteed worse weather.

Those who stay can light up with the passage of Proposition 64, legalizing recreational use of marijuana, evaporating their troubles in a purple haze of hallucinogenic bliss.

John Seiler is a longtime California columnist. His email: writejohnseiler@gmail.com

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Prop. 55: California Voters Extend Highest Income Tax Brackets to Fund Education and Healthcare

November 10, 2016 By Chris Micheli 1 Comment

classroomCalifornia voters on November 8 passed Proposition 55, which is an initiative constitutional amendment which took effect on November 9. This ballot measure was the successful effort to extend the Prop. 30 highest marginal tax rates promoted by Gov. Brown and others in 2012 as a “temporary tax” to help stabilize the state’s General Fund. Prop. 55 was opposed by some segments of the business community, but no serious opposition effort was mounted against this ballot measure.

Pursuant to the Attorney General’s Title and Summary, Prop. 55 extends by 12 years the “temporary” personal income tax increases enacted in 2012 on earnings over $250,000 (for single filers; over $500,000 for joint filers; over $340,000 for heads of household). Prop. 55 allocates these tax revenues 89 percent to K-12 schools and 11 percent to California Community Colleges, as well as up to $2 billion per year in certain years for health care programs.

While the ballot measure also prohibits the use of education revenues for administrative costs, it provides local school governing boards with discretion to decide, in open meetings and subject to annual audit, how revenues are to be spent. These are among the required audits and disclosures under Prop. 55.

According to the revenue estimates prepared by the Legislative Analyst and the Director of Finance, the enactment of Prop. 55 “will result in increased state revenues annually from 2019 through 2030 — likely in the $5 billion to $11 billion range initially — with amounts varying based on stock market and economic trends. These increased revenues will be allocated under constitutional formulas to schools and community colleges, budget reserves and debt payments, and health programs, with remaining funds available for these or other state purposes.”

According to the official ballot arguments: “PRO: Prop. 55 helps children thrive! Prop. 55 prevents $4 billion in cuts to California’s public schools, and increases children’s access to healthcare, by maintaining current tax rates on the wealthiest Californians — with strict accountability requirements. We can’t go back to the deep cuts we faced during the last recession.”

“CON: Vote No on 55 — Temporary should mean temporary. Voters supported higher taxes in 2012 because Governor Brown said they would be temporary. State budget estimates show higher taxes are not needed to balance the budget, but the special interests want to extend them to grow government bigger.”

As explained by the independent Legislative Analyst Office, over half of California’s budget is spent on education and that portion of the budget has seen a 50 percent increase in spending since Prop. 30 was enacted just a few years ago. The personal income tax provides a large portion of the State’s General Fund, followed by the sales tax and the corporate income tax.

High-wage earners, as well as thousands of small businesses that pay under the personal income tax, will continue paying an extra 1 percent, 2 percent or 3 percent tax on their income for an additional 12 years. The ballot measure also creates a formula to provide additional funds to the Medi‐Cal program from the 2018‐19 state fiscal year through 2030‐31. Although included in Prop. 30, this ballot measure does not extend the expiring sales tax increase of a quarter percent.

While the proponents repeatedly claimed that Prop. 55 continues a tax on “millionaires,” that clearly is not the case. Many small businesses that gross or net less than 1 million dollars will be impacted, as well as individuals making $263,000 or more, hardly the definition of a millionaire. At least a quarter of personal income tax revenue in California is generated by small businesses (i.e., sole proprietorships, LLCs, Subchapter S corporations, etc.). Some have estimated that over 80 percent of small businesses pay under the PIT Law.

To make matters worse, Prop. 55 taxes capital gains as ordinary income. With the continued volatility of the global and domestic stock markets, California will likely see big increases and decreases of PIT receipts with the drops and bumps of those stock markets. Moreover, with over $3 billion in the state budget reserves, some have questioned the need to extend the tax increases under Prop. 30 until they expire in 2018.

Prop. 55 extends the following income tax brackets, the highest marginal rates in the nation:

For individual filers (double the figures for joint filers):

  • Over $263,000 – 10.3% tax rate
  • Over $316,000 – 11.3% tax rate
  • Over $526,000 – 12.3% tax rate
  • Over $1,000,000 – 13.3% tax rate (includes 1% surcharge for mental health)

As a result of the enactment of Prop. 55, thousands of individuals and small businesses will be saddled with additional taxes over the next dozen years and California will continue to have the highest base rates in the nation for those paying taxes under the state’s personal income tax law. While a highly progressive tax system is desired by some interest groups in California, the current rates are at such a level that some believe they are fundamentally unfair and result (along with the highest federal income tax bracket) in more than 50 percent of income being taxed by the state and federal governments.

Chris Micheli is an attorney and legislative advocate with the Sacramento governmental relations firm of Aprea & Micheli. 

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Proposition 55 — Impressive Distortions, Unimpressive Policy

October 27, 2016 By Gary M. Galles Leave a Comment

If there was a convincing case for a law, making it would not require distortions. Consequently, when arguments involve multiple misrepresentations, the likelihood of good policy, rather than a means to pick pockets, is minuscule.

Proposition 55 demonstrates this. It would extend explicitly temporary income tax hikes Proposition 30 imposed on California’s highest income earners in 2012 (to the highest rates in America), for a budgetary emergency, from 2018 to 2030.

prop-55The voter guide’s pro-55 argument offers little but distortions. It claims it “prevents billions in budget cuts,” using terms like “devastating,” by making “the wealthiest Californians continue to pay their fair share.” It asserts multiple times that it will not raise anyone’s taxes, assures voters that no one else will be affected by those taxes, and that “Under Proposition 55, all Californians’ sales taxes are reduced.”

However, no education cuts are currently planned. Proposition 30’s money pipeline continues until the 2019-2020 fiscal year. Education spending has jumped almost $25 billion (over 50 percent) since 2012, while the state budget went from a huge deficit to a sizeable surplus and a rainy day fund. No budget emergency justifies extending Proposition 30’s highly disproportionate impositions from 4 years to 16 years.

Claiming Proposition 55 would ensure that the wealthiest Californians would continue to pay their fair share is similarly distorted. Even granting that “fair share” rhetoric has real meaning, rather than offering a never-ending source of complaints so undefined opponents cannot refute them, it falls flat. If the heavily disproportionate income tax burdens before Proposition 30 were considered “fair,” the much higher burdens it temporarily imposed cannot be bootstrapped into a new, even more disproportionate standard of fairness.

Pro-55 rhetoric of providing for our children also differs from its actual effect. Much of the money will backfill underfunded pensions, increasing those teachers’ retirement security, but doing nothing for our children. With about four-fifths of education expenses teacher compensation, other funding increases will largely go to existing teachers, regardless of whether added benefits are provided to children. And cynicism is justified by teachers unions’ bare-knuckle opposition to every accountability reform that would benefit students.

The pro-55 argument asserts it does not raise anyone’s taxes. However, while it would not raise higher income earners’ tax rates from the temporarily boosted levels of Proposition 30, it boosts them from what they would have been in the absence of Proposition 55. Further, extending those tax rates a dozen years could add over $100 billion in burdens. Imposing such huge added burdens can only be dishonestly characterized as not raising anyone’s taxes.

Those not directly facing higher tax rates will also pay a price, contrary to pro-55 claims. Every restriction in supply (e.g., from producers leaving California, as documented after Proposition 30) it causes will harm everyone else through the “tax” of higher prices. This is especially problematic with many small businesses paying personal income tax rates on their business income, guaranteeing that many non-wealthy Californians will leave or face much higher taxes for years.

While Proposition 55 backers portray a huge income tax boost as nonexistent, they do the converse for sales taxes. They say, “Under Proposition 55 all Californians’ sales tax are reduced,’ and further claim it as economic stimulus. But in fact, under Proposition 30, the sales tax rate will fall back to its earlier level anyway. Whether Proposition 55 passes or fails changes nothing, but backers pretend it does.

Pro-55 interests misrepresent the education budget situation, supposedly “fair” tax shares and who gains. They assert a huge increase in tax burdens does not raise anyone’s taxes, while crediting a tax reduction that will happen anyway to Proposition 55. Cramming all that disinformation, and more, into the heavily-funded pro-55 campaign, while keeping straight faces, is an impressive feat. But going to such overwhelming lengths to deceive voters is not an impressive reason to vote for it.

Gary M. Galles is a professor of economics at Pepperdine University, a research fellow at the Independent Institute, adjunct scholar at the Ludwig von Mises Institute, and member of the FEE faculty network. His books include Apostle of Peace (2013), Faulty Premises, Faulty Policies (2014) and Lines of Liberty (2016).

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