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Out of Control Policy Blog Archives: 2.3.13–2.9.13

California Tax Increases are Bigger Than They Look

Richard Rider, who runs San Diego Tax Fighters, had a great letter to editor in the Wall Street Journal about the actual increase in CA state taxes. You can read the original here, but the letter read:


Regarding your editorial "The State Tax Reformers" (Jan. 30): Here's what everyone has missed concerning state income taxes. For the really rich (people with over $2 million income), in 2013 the deductibility of state and local taxes (income, property and other taxes) is 80% disallowed. The effect can be dramatic.

Consider the recent flap concerning the hapless Phil Mickelson who spoke out about the new, higher taxes. Between the 29% California income-tax increase on millionaires (to 13.3%) and the loss of the deductibility on federal returns, his 2013 net California income tax will be 12.3%. In 2011, it was 6.7%. That's an astonishing 83.6% increase.

When you make that much income and have relatively few deductions (even when deductions were allowed before 2013), you seldom if ever trigger the Alternative Minimum Tax. Mr. Mickelson earns income with relatively few deductions, tax credits, etc., so he's probably been paying the full rate for many years. It's only the returns where special income (some municipal-bond income, for instance) or massive deductions are used that the AMT is triggered—ironically, mostly for incomes below $1 million.

In 2005, the maximum California tax went up from 9.3% to 10.3% for those with over a million-dollar income. At the time, the state income tax was fully deductible. With a 35% maximum federal tax bracket, that meant that the increase cost the rich a net 0.65%.

With the changes I've discussed, the 2013 net California income-tax increase is 5.6 percentage points—8.6 times higher than the 2005 increase. Only a fool would think that such a massive increase would not motivate many of the wealthy to depart California.



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Discussing Prison Privatization on HuffPost Live (VIDEO)

I recently had the opportunity to appear on HuffPost Live, The Huffington Post's new Internet-based video streaming network, to discuss how federal and state policymakers partner with private prison operators (video embedded below).

The idea of partnering with for-profit operators can be challenging to some, however it is important to note public sector agencies (and their employees) don't work for free. In fact, as the host of this program notes, they share many of the same incentives as for-profit prison operators. Meaningful criminal justice reform seeks to change these incentives and move towards performance-based outcomes on critical metrics like inmate education, recidivism reduction and more. My colleagues Adrian Moore and Leonard Gilroy outlined this new approach, dubbed Corrections 2.0, in a study of the same name available online here. Well-structured public-private partnerships also allow accountability through rigorously enforced contracts.

For more of Reason Foundation's work on corrections and criminal justice, see the Prisons and Corrections Research Archive online here.

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Some Steps for Congress on Pension Reform

In this Wall Street Journal column Reason's Carl DeMaio explains how severely unsustainable are many state and local government pension plans.

A 2011 study by the Congressional Research Service pegged the combined liabilities faced by state and local pension funds at over $3 trillion. That is more than all the bonded debt officially listed on state and local balance sheets combined. To put the issue in perspective, all the federal tax hikes approved by Congress on Jan. 1 would pay less than 20% of America's state and local pension debt over the next 10 years.

Naturally, solving that problem is mostly a state and local issue. 

But there are a few useful things Congress can do. It seems odd these days to ask Congress to do something fiscally responsible, since that seems so far from their agenda, but the fixes have to start somewhere. 

First, Carl points out that 

Washington has tightly regulated private pension systems since the 1974 Employee Retirement Income Security Act, but that law exempted the pension systems of state and local governments. Four decades and $3 trillion in debt later, it is clear Congress made a mistake.


Scores of state and local governments are using "pension obligation bonds" to bail out troubled pension programs on the risky wager that they can beat Wall Street investment returns. There is $64 billion in such bond debt outstanding in the U.S., with more expected to flood the market this year. 

Borrowing to make payments into a fund for future pension obligations is like me borrowing from my bank to pay my credit card. Bad financial management. Unfortunately, federal tax policies encourage pension obligation bonds, and Carl recommends changing that.

Read the whole thing here.

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Taxing and Regulating Recreational Marijuana in CO, WA (AUDIO)

I recently appeared on the Tax Policy Podcast hosted by Richard Morrison, Manager of Communications at the Tax Foundation, to discuss taxing and regulating recreational marijuana in Colorado (Amendment 64) and Washington State (Initiative 502). The roughly fifteen minute interview covers a wide range of issues, such as:

  • Providing background on marijuana policy issues in Colorado;
  • Defining the language, regulatory and tax concerns of Amendment 64 within the context of implementation;
  • Explaining the challenges of formalizing the recreational marijuana industry;
  • Comparing repealing prohibition of alcohol to marijuana;
  • Highlighting federal and state concerns that may inhibit implementation; and much more.

Listen to the full interview online (MP3 audio file) here.

To clarify one comment I made in the interview, technically the Oregon's Measure 80 would not have created state owned and operated stores. However, it would have put strong state controls in place, including price setting, the summary of the certified ballot reads:

Currently, marijuana cultivation, possession and delivery are prohibited; regulated medical marijuana use is permitted. Measure replaces state, local marijuana laws except medical marijuana and driving under the influence laws; distinguishes "hemp" from "marijuana"; prohibits regulation of hemp. Creates commission to license marijuana cultivation by qualified persons and to purchase entire crop. Commission sells marijuana at cost to pharmacies, medical research facilities, and to qualified adults for profit through state-licensed stores. Ninety percent of net goes to state general fund, remainder to drug education, treatment, hemp promotion. Bans sales to, possession by minors. Bans public consumption except where signs permit, minors barred. Commission regulates use, sets prices, other duties; Attorney General to defend against federal challenges/prosecutions. Provides penalties. Effective January 1, 2013; other provisions.

For more on this issue, see Reason Foundation's drug policy research archive here.

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