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.