Taxable Talk

Dick Murphy, mayor of San Diego, announced that he is resigning effective July 15th. His resignation is a direct result of San Diego's abysmal financial condition, as I noted earlier.

No, that's not my wish; rather, it's director Rob Reiner's. Today he announced a proposal to increase the normal maximum California tax bracket from 9.3% to 11% (anyone earning more than $1 million would pay an additional 1%). The new tax bracket would begin at $400,000 for individuals and $800,000 for couples. The money would be earmarked for mandatory preschools for every four-year old. A brief synopsis of the story can be found here (one-time registration required).

While pre-school, according to a Rand study, does increase the likelihood of a child being held back a grade, would decrease child abuse, and would increase high school graduates, this proposal would cause (1) small companies to have yet another reason to leave California; (2) more large companies would choose not to locate new operations in the state; and (3) more high-worth retirees would leave. I won't argue the benefits from pre-school. However, I know what the costs of the plan will be. It's likely that the voters will decide this in June 2006.

As reported by the Orange County Register in this story (free registration required), Orange County faces a potential $80 million deficit if a firefighters union sponsored proposal passes on next year's ballot.

Much of the problem has to do with local pensions, a problem that is plaguing the City of San Diego. Several articles have been written (here, here and here) about their pension problems, which threaten to drive the City of San Diego towards bankruptcy.

To say that government pensions are generous is an understatement. A friend of mine worked for 25 years in a neighboring county. She retired and now receives about 60% of her final salary, every year. Assume you work for 25 years in private industry. Will you receive a pension at 60% of your final salary? Will you receive health care while you're retired?

The only defense I can make for the pensions is that government workers do not make as much while working as people in private industry. But that's the only defense I can make. Meanwhile, county supervisors (and city councils) tend to sign pension agreements that later generations can't afford.

Forever.

That may not seem reasonable, but California has no statute of limitations on collections of tax-related debt. That means that 30 years from now you could receive a letter from the state saying, "You didn't file so pay us $25,000."

Indeed, during the recent amnesty, California sent several such letters, as detailed in this article. Do you know where your 1984 tax return is?

While the state has four years to challenge anything on the return (the IRS has three; these dates being from due date of the return or date of filing, whichever is later), the Franchise Tax Board is extremely aggressive. Too aggressive. The solution, unfortunately, is to keep everything forever. At least until the law changes.

Answer: When it's proposed by our Democratic led legislature.

As reported in various news stories (here, in the Los Angeles Times (one-time registration required)), Democrats are proposing to lower California's gasoline tax. (As you may remember, earlier this year the State floated the proposal to add a "per-mile" tax to increase gasoline tax revenues.) The actual package would:
(1) Decrease gasoline taxes by $0.11/gallon
(2) Increase sales taxes temporarily by 0.25%
(3) Increase gas tax over the next ten years by $0.04/gallon
(4) Decrease the sales tax if the Federal estate tax increase in 2010-2011 actually happens. (The California estate tax is tied to the Federal. Thus, an increase in the Federal estate tax will increase revenue to California.)

I haven't read the legislation (as you might imagine, I'm a bit busy this time of year); I'll look at it in a week or two. But frankly the Republican comments that this looks like a Rube Goldberesque scheme to increase taxes appear dead-on accurate.