Commentary

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.

Adrian Moore

Adrian Moore, Ph.D., is vice president of policy at Reason Foundation, a non-profit think tank advancing free minds and free markets. Moore leads Reason's policy implementation efforts and conducts his own research on topics such as privatization, government and regulatory reform, air quality, transportation and urban growth, prisons and utilities.

Moore, who has testified before Congress on several occasions, regularly advises federal, state and local officials on ways to streamline government and reduce costs.

In 2008 and 2009, Moore served on Congress' National Surface Transportation Infrastructure Financing Commission. The commission offered "specific recommendations for increasing investment in transportation infrastructure while at the same time moving the Federal Government away from reliance on motor fuel taxes toward more direct fees charged to transportation infrastructure users." Since 2009 he has served on California's Public Infrastructure Advisory Commission.

Mr. Moore is co-author of the book Mobility First: A New Vision for Transportation in a Globally Competitive 21st Century (Rowman & Littlefield, 2008). Texas Gov. Rick Perry said, "Speaking from our experiences in Texas, Sam Staley and Adrian Moore get it right in Mobility First." World Bank urban planner Alain Bartaud called it "a must read for urban managers of large cities in the United States and around the world."

Moore is also co-author of Curb Rights: A Foundation for Free Enterprise in Urban Transit, published in 1997 by the Brookings Institution Press, as well as dozens of policy studies. His work has been published in the Wall Street Journal, Los Angeles Times, Boston Globe, Houston Chronicle, Atlanta Journal-Constitution, Orange County Register, as well as in, Public Policy and Management, Transportation Research Part A, Urban Affairs Review, Economic Affairs, and numerous other publications.

In 2002, Moore was awarded a World Outsourcing Achievement Award by PricewaterhouseCoopers and Michael F. Corbett & Associates Ltd. for his work showing governments how to use public-private partnerships and the private sector to save taxpayer money and improve the efficiency of their agencies.

Prior to joining Reason, Moore served 10 years in the Army on active duty and reserves. As an noncommissioned officer he was accepted to Officers Candidate School and commissioned as an Infantry officer. He served in posts in the United States and Germany and left the military as a Captain after commanding a Heavy Material Supply company.

Mr. Moore earned a Ph.D. in Economics from the University of California, Irvine. He holds a Master's in Economics from the University of California, Irvine and a Master's in History from California State University, Chico.