Phil Mickelson has overcome a chronic illness (psoriatic arthritis) and continues to be one of the best golfers in the world. However, Mr. Mickelson golf game may be felled by something that his home state of California and the US government have implemented: taxes.
From the Golf Blog (from Sports Illustrated), Mr. Mickelson is quoted as saying,
There are going to be some drastic changes for me because I happen to be in that zone that has been targeted both federally and by the state and, you know, it doesn’t work for me right now…so I’m going to have to make some changes…
If you add up all the federal and you look at t he disability and the unemployment and the Social Security and the state, my tax rate’s 62, 63 percent. So I’ve got to make some decisions on what I’m going to do.
Ouch: A 62% marginal tax rate is quite high. His income tax rate is likely a bit less; Joe Kristan calculates it at 52%. Whether it’s 52% or 62%, it’s a lot, and when you earn $61 million a year before taxes, you don’t want to see your pay reduced by over half.
Mr. Mickelson could move to Nevada or Florida, and his tax rate would drop by about 8%; still high, but not astronomically high. I suspect Mr. Mickelson is torn between living in one of the most beautiful areas of the world (he resides in suburban San Diego) versus keeping more of his hard-earned income.
Now let’s consider entrepreneurs who call Silicon Valley home. They’ve been building up businesses, and let’s assume they see an opportunity to go “public” (issue stock on a stock market) and cash in. Let’s look at what would happen if they are in California versus Texas (or Nevada):
1. In California, they’ll face the highest state income tax in the country (13.3%) versus no income tax in Texas.
2. In California, capital gains are taxed as ordinary income for state taxes. There is no tax in Texas. (Many states with state income taxes have preferential capital gains treatments, too…but not California.)
3. In California, there is no Qualified Small Business Stock exemption. Not an issue in Texas; there’s no state income tax.
4. California has one of the worst business climates in the country (especially with regulations). Texas is among the best in the country.
So assume you are the president of HighTechCo, a Silicon Valley start-up. You can go public in California, or you can move your business to Texas. If you end up in Texas, you will make more money off your initial public offering (IPO), you will end up in a better regulatory climate, and you can hire employees at generally lower wages than in the Bay Area. Sure, the weather isn’t as good as California, but there are no earthquakes either. I suspect a lot of business owners will elect to use moving vans prior to their IPOs.
As Alan Greenspan said, “Whatever you tax you get less of.” California is going to find out that their tax increases will not be the long-term savior of their budgets. The only solution is cutting expenditures. Business owners can move, and many individuals (such as Mr. Mickelson) and businesses (such as the hypothetical HighTechCo) are going to choose that route.