Taxable Talk

Yet another California non-conformity issue has reared its head. Those of us who are self-employed must pay self-employment tax on their self-employment earnings. The self-employed get to deduct 50% of that on line 27 of Form 1040.

In 2011 the self-employment tax changed from 15.3% to 13.3% on the first $106,800. However, the deduction is still based on 15.3% rather than 13.3%. So let’s say I paid $1,000 in self-employment tax; my deduction is $575, not $500. A little extra benefit…except on your California return.

For California purposes, the deduction is $500, not $575–it remains at 50% of the amount paid in self-employment tax. I noticed this with one of my California clients and called the FTB to verify this. The California legislature did not pass conforming legislation. Those of you who are self-employed Californians will see an adjustment on Schedule CA of your Form 540.

This was noted in today’s San Francisco Chronicle. The Chronicle also noted that TurboTax hadn’t updated its software until last Friday. Apparently, the Franchise Tax Board forgot this adjustment until after the tax forms were initially generated.

Those of you who have filed returns with “material” changes will likely get notices noting the adjustment and proposing an additional amount of tax to pay.

A few years ago, the California Legislature passed a bill requiring the Board of Equalization (California’s sales tax agency) to publish a list of the top 500 deadbeats each quarter. That list has just been updated. On top of the list is California Target Enterprises Inc. with a debt of $18.4 million; at the bottom of the list is Mega Micro, Inc. with a debt of $404,390.

In scanning the list the one thing that struck me was the number of automobile dealerships on the list. I can’t believe it’s that hard to figure out and remit the sales tax on a new or used car. However, my mother told me about how “honest” used car salesmen are….That said, there are new car dealers on the list, too; a relatively new listing is Auto First Financial Corp. dba Silicon Valley Hummer with a debt of $2.85 million.

To date, the list has caused the BOE to receive $5.3 million in payments, so this is one of the few accomplishments of the California legislature.

Every time I think the Bronze Golden State has reached a new low, I have to remember that I should never overestimate the intelligence of the California legislature. Kevin De Leon (D-Los Angeles) has introduced a bill that requires any business with five or more employees to have a defined benefit pension plan. Employees would contribute around 3% of their wages into the plan; employers would be allowed to make voluntary contributions. The plans, though, would be mandatory to California businesses.

The unintended consequences of passage of this bill are simple. First, would employer contributions remain voluntary for long? I doubt it. And that leads to the second consequence: Fewer employers in California. Why would any business expand in high-cost California where regulation after regulation is put upon it when they can expand in a lower cost environment (such as Nevada or Texas). This leads to the final consequence: Fewer employees in California.

I also have to wonder if the Democrats in Sacramento have ever taken a course in basic economics.

In what might be an “I told you so” moment, Haas Automation of Oxnard, California (northwest of Los Angeles) is growing and needs to expand. They began the planning for a $20 million new building and all seemed well.

And then Governor Brown and the Democrats who control Sacramento started debating tax increases. Not will there be an increase, but which increase should pass. Businesses don’t like that, and Haas put a stop to the new building.

Let’s see what California offers in comparison to, say, Nevada and Indiana (which just became a “Right to Work State”). California does have a well-trained workforce, and for machine tools it’s likely better than Nevada. Indiana might meet that quality of workforce (there is a lot of automotive industry work done in Indiana).

Now, let’s examine the disadvantages: California is a regulatory nightmare; Nevada and Indiana aren’t. Wages in California are higher than Nevada and Indiana. California is the opposite of a Right to Work State while Nevada and Indiana are Right to Work States. Nevada has no state income tax while Indiana is in the middle of the pack for income taxes; California has one of the highest income tax structures in the United States. This news story notes that other states are offering free land, interest-free loans and savings on property tax. California offers none of that.

Perhaps the California legislature might ask themselves what would happen if they keep driving successful businesses out of state…because their actions are doing just that. Or perhaps they think that businesses don’t act rationally? If that’s what they do believe, they are wrong: Businesses don’t want to move, but if they must they will. Businesses do act rationally, and if it is prohibitively expensive to expand in California they’ll expand elsewhere.

One other unrelated point: I’m glad to see that Haas Automation has recovered from the actions of its founder. For those who don’t remember, Gene Haas was my Tax Offender of the Year for 2007. They just produced their 125,000th CNC Machine; that’s a remarkable feat for the company.

One of the blogs I read, How Appealing, posted a link to this story on California’s attempt to ban video games featuring “murder and mayhem” from being sold to children cost the Bronze Golden State $2 million.

That’s nothing.

There’s a case that’s still waiting to be heard at the Nevada Supreme Court that’s cost California taxpayers many millions, and has the potential to cost the state over half a billion (yes, $500,000,000). The Franchise Tax Board’s appeal of Gilbert Hyatt’s lawsuit is waiting a date to be set for oral argument. It’s been stuck in this status for over a year (the last change noted in the online tracking system for the case was on February 4, 2011). I don’t know what the average wait time is, but most likely later this year this case will be heard.

If the appeal is heard here in Las Vegas (the Nevada Supreme Court holds sessions in Carson City and Las Vegas), I plan on attending…some day (hopefully in 2012).

In what must be considered to be a complete non-shock to all but officials of the Brown Administration, California’s tax revenues came in $528 million under budget. According to Bloomberg, most of this is from a $525 billion shortfall in income taxes.

While California’s Department of Finance says it’s “too soon” to tell whether April income tax collections will make up for January, I can give them the answer now: They won’t be. When individuals lower their January estimated payments, it’s almost always because they know they made less during the previous year and don’t owe the money. I expect California collections in April to also be below forecast.

Over the years, I’ve referred to New Jersey as the swamplands. Their politics, corruption, and tax policies left a lot to be desired. But something unusual happened in 2010: Chris Christie, a Republican, was elected governor in the historically Democratic state. This past week Governor Christie decided he’d like to improve on the Tax Foundation’s ranking of New Jersey as the worst state in the country for taxes; he proposed a 10% across-the-board cut to the state’s income tax.

I do need to point out that even with a 10% cut New Jersey’s top income tax rate would be 8%. That’s quite high, but in comparison to the nearly 13% a New York City resident would pay it’s not that bad.

I have no idea if Governor Christie will be successful or not but the Wall Street Journal noted that his proposal has caused Democrats to propose lowering other taxes. Meanwhile, Governor Jerry Brown of California proposes higher taxes. If both Governors are succesful I suspect that next year California and New Jersey will swap places on the Tax Foundation’s rankings so that the Bronze Golden State will truly be tarnished.

The Tax Foundation released their 2012 State Business Tax Climate Index today. And it was no surprise to see the bottom three composed of California, New York and New Jersey. These states have high taxes overall (California adds high regulatory costs, too; however, the business climate index ignores this). Meanwhile, Wyoming, South Dakota, and Nevada are the top three states. No surprise: These states don’t have high taxes (they don’t have personal or corporate income taxes at all).

Here are the top ten:
1. Wyoming
2. South Dakota
3. Nevada
4. Alaska
5. Florida
6. New Hampshire
7. Washington
8. Montana
9. Texas
10. Utah

And the bottom 10:
41. Iowa
42. Maryland
43. Wisconsin
44. North Carolina
45. Minnesota
46. Rhode Island
47. Vermont
48. California
49. New York
50. New Jersey

For those who wonder if business pay attention to taxes, I can speak from experience: They do.

Arthur Laffer popularized the Laffer curve. The father of Supply Side Economics noted that in many cases, increasing the tax rate decreases the amount of tax revenues. It appears that Illinois is proving Dr. Laffer correct.

Moody’s just downgraded Illinois’ bond rating to A2 from A1. Illinois now has the worst rating of all 50 states–even worse than California. But wait: Didn’t Illinois pass a massive tax increase a year ago? Wasn’t that supposed to help Illinois’ financial condition? Here’s how the Wall Street Journal put it:

So much for that. In its downgrade statement, Moody’s panned Illinois lawmakers for “a legislative session in which the state took no steps to implement lasting solutions to its severe pension underfunding or to its chronic bill payment delays.” An analysis by Bloomberg finds that the assets in the pension fund will only cover “45% of projected liabilities, the least of any state.” And—no surprise—in part because the tax increases have caused companies to leave Illinois, the state budget office confesses that as of this month the state still has $6.8 billion in unpaid bills and unaddressed obligations.

There is some good news for Illinois. Governor Jerry Brown and other California Democrats are proposing a variety of tax increases for the Bronze Golden State (to be voted on in this fall’s election). It may well be that California will pass Illinois to the #1 spot.

Hat Tip: HotAir

When I read one report stating that California is looking at an $8 billion deficit (that’s Governor Brown’s projection), I was quite happy I’m now a resident of Nevada. And then I read Chriss Street’s report that says the deficit is really $21 billion!

Whatever the true number is–it most likely lies somewhere between the two numbers–there isn’t any doubt that California continues to spend its way to oblivion. The problems, according to the Left, include low taxes, Proposition 13, issues with the tax system, etc.

There seems to be a pattern, eh?

Here is a helpful hint for California: You must lower your expenses. This means cutting the size of state government, cutting pension costs, and cutting salaries. Additionally, California must make itself more attractive to people like me who have fled the Bronze Golden State. Regulations must be cut.

I had a thought, but dismissed it as too obvious. For every new regulation put on the books in California, two should be removed. If that were done California would likely solve its problems within a few years. Of course, my idea here is just wishful thinking. The Democratic Legislature in California thinks that the Golden State is truly golden, and these issues are because the tax rates are just too low. Well, California only has the second worst business climate of the 50 states, so there is room for improvement!