Taxable Talk

There's a great op-ed piece in today's San Francisco Chronicle about the hybrid vehicle tax credit. The op-ed, written by Edward McQuarrie, a professor at Santa Clara University, gives the unpleasant details of how many Californians won't get the full value of the credit: the AMT will eliminate the tax break for many. I've been warning clients about this for some time.

But if you're single, making between $25,000 and $115,000, you will likely get the full credit. Everyone else should read the article and learn why the AMT needs to be reformed (though that is very unlikely to happen in today's Congress).

California has always mandated that for all distributions to out-of-state S Corporation shareholders, 7% be withheld for state income tax to the Franchise Tax Board. However, there was no enforcement of this mandate. That's changed for 2007.

The Franchise Tax Board will now enforce this. So if you're an out-of-state shareholder in a California S Corporation, you'll be getting 93% of what you thought you'd get. Exemptions are available if you've been filing (and paying) California state income tax, or you can demonstrate to the FTB that the withholding rate is higher than your actual tax rate.

Hat Tip: Jeff Quin, North Lake Tahoe Bonanza

California has been in the grips of a freeze. It's estimated that the cold weather will cost California growers billions of dollars. You and I will feel the pain when we go to buy citrus in coming weeks -- expect prices to skyrocket.

But there's another impact, one that the media hasn't picked up on (yet). Taxes.

Businesses pay taxes based on their net income. The freeze of 2007 will drastically impact the agriculture industry in California, and will cause profits to melt away. No profits, no tax due.

Estimated tax receipts will fall through the year as the impact becomes known. Individuals will be laid off (no crops to pick). California's Central Valley will be devastated, and government support programs will be necessary. So expenses will rise, while receipts fall.

Meanwhile, the Governator proposes a new health program. Who is going to pay for this? With what money?

In 2007 and 2008, money won't grow on trees, and neither will tax revenues.

The Governator announced his health care vision yesterday. You can find a good summary of it here. The plan would mandate that all Californians have health insurance, and the state would mandate what would and wouldn't be covered. The plan would be funded by a 4% payroll tax, a 4% tax on hospital revenues, and a 2% tax on physician's income.

Excuse me, they're user fees, not taxes. Of course, that's to get around the California constitution, which mandates that new taxes pass by a 2/3 vote of the legislature. So if when this passes the legislature (and it will pass) by a simple majority, someone will file a lawsuit, and this will be in court for a couple of years.

Last week I wrote,

"The Governator has been hinting that he'd like to see some sort of mandated health coverage for Californians. I'd like to see it, too, but in a way that is not government run, government mandated, and government funded. I think that Californians—the same Californians that voted down a mandatory health care initiative—need to let their Assemblymen and State Senators (and the Governator) know how they feel."

What did the Governator propose? A government mandated, government funded system. It's not run by the government; however, it might as well be. The government will decide what will and won't be covered.

This proposal is a recipe for economic disaster in California. The payroll tax falls on employers who have ten or more employees. That's a lot of small businesses. If I were the Nevada Development Authority, I'd be getting my advertisements ready.

A second problem is what will happen with this proposal after it emerges from the legislature. California's legislature leans to the left...well, that's an understatement. It's very liberal. I expect this legislation to be added to like a Christmas tree, with all sorts of pet mandates being added to it.

Other major problems with this proposal include mandated coverage for illegal aliens, a new state bureaucracy to enforce the legislation (part of the Christmas tree), and, as Ed Morrissey notes, the strong likelihood that prospective doctors will either choose other professions or other states to practice in.

There is at least one good point about this proposal: I won't have to worry about health insurance any more....

You own a Christmas tree lot, and it's December 26th. What do you do with your leftover trees?

Well, it's time to throw them away...but not for one lot owner near Fresno. No, they're not hazardous waste. Rather, the Board of Equalization wants to make sure that the lucky owner has paid all of his taxes.

What taxes? Well, the owner bought the trees for resale, and didn't pay any sales tax on the trees. His customers paid sales tax when they bought the trees. However, the leftover trees (which are being destroyed) have never been taxed. Before they're destroyed, the lot owner must pay sales tax on the soon to be composted trees.

As this brief story notes, the Board of Equalization wants to make sure that sales tax is paid on every single tree.

Dan Waters, columnist for the Sacramento Bee, reports today that he's been told that one individual paid the Franchise Tax Board $200 million in back taxes under California's amnesty program last year.

An examination of California's budget shows that the $200 million paid by Mr. (or Ms.) Doe represents 10% of California's budget "reserve." As Mr. Waters accurately notes, the top 3% (by income) taxpayers in California pay half of California's personal income taxes. Waters notes that the tax revenues to the state are now largely determined by the capital gains of these taxpayers. And he's right.

Furthermore, California has a structural budget deficit. The California Taxpayers Association pegs this at $5 billion. That's a huge amount of money to overcome on an annual basis.

So with the legislature about to go into session, are we seeing proposals to fix this? Is the Governator proposing fixes? Do we hear from the Democrat majority in the State Senate or Assembly about this?

No.

Instead, I'm reading about new projects, proposals that will take money. In other words, our legislative leaders haven't learned a thing. Samuel Johnson put it well: "Whatever you make, spend less."

Assuming that these new proposals pass (and if both Democrats and Republicans are pushing them, they will pass), then the structural deficit will grow. And the problem will get deeper. And taxes will go up.

However, what happens if the top taxpayers decide to move to, say, Nevada? Or they don't cash in on their investments? This scenario may be frightening to the legislative leaders and the Governator, but I think that sooner or later—sooner if this path is followed—very high income taxpayers will say "enough is enough" and move to a lower tax state.

So we'll see if California's legislators and governor have learned anything about budgets. I'm not hopeful.