Here’s the fact that EVERYONE (including me) initially underappreciated concerning Phil Mickelson and CA state income taxes. Starting in 2013, Mickelson’s NET state income tax has jumped 83.6%! And yes, this huge increase hits most Californian making more than $2 million income.
Here’s why. Until 2013, state income taxes were deductible for federal income tax purposes. Starting in 2013, for the really rich, this deductibility largely goes away (as does deducting property taxes and many other deductions). For people with over $2 million of income, they lose 80% of such deductions.
With Proposition 30 passed in November, CA has raised its income tax on the wealthy by 29%. The combined tax increase is breathtaking. Do the math, and you find that in 2011 the net CA income tax for Mickelson was 6.7%. In 2013 his net CA income tax is 12.3% — an increase of 83.6%.
Some would respond that Mickelson has been subject to AMT (the Alternative Minimum Tax) and thus could not deduct his state income tax in years past. But almost surely he has NOT been subject to AMT.
When you make that much income, and have relatively few deductions (even when deductions were allowed prior to 2013), you seldom if ever trigger AMT. Mickelson earns income with RELATIVELY few deductions, tax credits, etc. so he’s been paying the full rate for many years. It’s only the returns where special income (some municipal bond income, for instance) or massive deductions are used that AMT is triggered — ironically mostly for incomes below $1,000,000.
This little-noticed tax increase through the loss of deductibility was not brought up during the Prop 30 campaign because at the time state income taxes were still fully deductible for federal income tax purposes. Only after the measure passed in November did the geniuses in Congress change the rules on this.
The big taxers love to point to a bogus study by the Stanford Center on Poverty and Inequality (the name says it all regarding their objectivity) which concluded that the California 1% millionaire’s tax increase in 2005 had little or no effect on millionaires leaving. While the study has since been largely discredited, the magnitude of that 2005 increase vs. the 2013 CA increase is worth considering.
In 2005, the maximum CA income tax went up from 9.3% to 10.3% for those with over a million dollar income. At the time, the CA income tax was fully deductible. With a 35% maximum federal tax bracket, that meant that the increase cost the rich a net 0.65%.
With the changes I’ve discussed, the 2013 NET CA income tax increase is 5.6% — 8.6 TIMES HIGHER than the 2005 increase. Only a fool would think that such a massive increase would still not motivate many of the wealthy to depart the “Golden State.”
Parenthetically might I add that California abounds with such fools.
This article is California-centric, but the change in the federal tax law regarding writing off state income (and property) taxes is bound to have wider effects. A recent story from the NEW YORK POST presents anecdotal evidence that that business magnates in NYC are suddenly more frequently moving to income tax-free south Florida — PERMANENTLY moving.
NY city’s combined state and city income tax is the 2nd highest in the nation — 12.696%. (BTW, how NY came up with a tax rate figured to the THOUSANDTH percent is one of the world’s great mysteries.) High as it is, the NYC total tax is still significantly lower than the CA 13.3% top income tax rate.
Leading the exit from NYC are hedge fund managers. Clearly the accelerating departure rate is resulting from the combination of higher federal taxes and the loss of the state income tax deduction (well, 80% of the deduction). At the 39.6% top federal tax bracket, that disallowance is an effective net state tax increase of 41.7% from 2012 to 2013. And that’s with NO state or city tax rate increase!
How long before liberal state politicians insist that D.C. rescind that loss of deductibility for state and local taxes — including property taxes? Surely it’s already underway. And so’s the moving out of the Big Apple.
It will be fascinating to watch the same people who claim that “tax rates don’t matter” battle for better tax treatment of local and state taxes. Delicious debate can be expected.