Six months and one day
By Nathan Mintz | February 28, 2010
For many wealthy Californians, six months and one day is the time in tax exile they spend each year to avoid paying our punitive tax rates while they are going through a major life change– either liquidating their stake in a business, pulling money out of a 401(k), or otherwise unloading assets. In a state where the top 10% of households pay 75% of the income tax, this is a huge problem: the people who are carrying the largest portion of the load are leaving the state to get out from under the taxation burden. Anyone who doesn’t believe this to be the case should take a drive over to the Nevada side of Lake Tahoe and see the multi-million dollar tax shelters in Incline Village. All those houses were financed with the savings from leaving California.
There are two reasons why wealthy Californians choose to leave the state when liquidating: the millionaire’s tax and California’s capital gains tax of 9.3%, which is the highest in the country. The so-called “millionaires” tax that was ushered in under Prop 63 a few years ago, supposedly to pay for mental health services. This is a 1% surtax on any income over $800,000. If you are making 20 million a year, then this tax will hit you for 200K/year just by itself.
The millionaire’s tax is annoying, but the capital gains tax is even worse. Unlike the federal government, which rewards “sweat equity” and charges a lower rate for long term capital gains (5% vs. 15%) California charges the highest rate across the board: 9.3%. Compare this with Washington, Nevada and Texas– no capital gains tax– and you now begin to understand why Millionaires are fleeing the state by the thousands when its time to cash out of long accumulating positions. If you are cashing out a 20 million dollar position, the difference in capital gains tax alone more than offsets the cost of buying a million dollar “cottage” in incline village.
The cost of this for local communities is huge: high end consumers patron local businesses and restaurants, buy goods in local stores and donate to local charities. This flight of millionaires out of the state is costing us millions (if not billions) in revenue for businesses, is retarding the recovery of the real estate market for high end property by displacing demand, and is basically undermining the private sector that is the foundation for the tax base. In other words, this “soak the rich” policy is really only soaking local communities and businesses– the rich will go elsewhere to avoid the pain. As Howard Jarvis Taxpayer’s Association President Jon Coupal put it so aptly: “A recent survey from TNS Research, an international business research firm, found the California counties of Los Angeles, Orange and San Diego had the 1st, 4th and 6th highest number of millionaires in the country. However, even as the national population of millionaire households grew by 5.9% in 2007, Los Angeles County lost about 7000 of these households. Orange and San Diego Counties lost millionaire households as well…Milton Friedman’s maxim that few things are as mobile as rich people and capital, is proven starkly by data showing the wealthy are leaving California in record numbers.”
An anecdotal example of this: one businessman I know has a partner who is getting ready to liquidate. He recently purchased a house in Southern Washington (near the border) and informed his business partner that he would be living there for six months and one day of each year until he was finished selling off his assets. The 10,000 dollar a month mortgage he was paying for the property he was only living in half the year more than paid for itself in the tax savings from not having to liquidate in this state.
So imagine if he stayed here instead: he would have spent hundreds of thousands in local businesses (generating sales tax revenue), given the money to local charities and invested it locally. We must take a serious look at this sort of punitive taxation and ask ourselves if we are really maximizing our revenue when the capital we are trying to tithe can find protection only a few hundred miles…and six months and a day away.
Topics: California Tax Policy, Sacramento, Taxes, Uncategorized | 6 Comments »
6 Responses to “Six months and one day”
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