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California Taxes We Pay

APRIL 12, 2024 | PRESSBANNER.COM

Wednesday Kirwan grew up in the Midwest but moved to California to raise her daughter with nature and small-town community life coupled with the Bay Area’s great educational and career opportunities. She fought hard for the SLV house and doesn’t plan to move.

I love the kind neighbors and towering cathedrals of redwoods in the Santa Cruz Mountains and will never willingly leave. The planner in me admits people can work here and then stretch retirement dollars further with cheaper houses in another state or country—but good planners also respect feelings we have for our birthplace. Most Ukrainians don’t flee missiles and we mustn’t flee state taxes just to become Scrooges.

According to the Tax Foundation, how do California taxes compare:

California mercifully has no estate or inheritance tax. Twelve states charge up to 20%.
Proposition 13 limits property tax increases to 2% yearly (without construction or disposition) and its effective tax rate of 0.7% of the values of our pricey homes places CA 34th in the country—not last.
Californians pay higher state gas tax rates (77.9 cents per gallon) than any state.
“California has a 7.25 percent state sales tax rate,” states Taxfoundation.org, “a max local sales tax rate of 2.50 percent, and an average combined state and local sales tax rate of 8.82 percent”.
California Corporations pay taxes—double taxes to shareholders—of up to 8.84%. We are number six.
California’s highly progressive individual income tax system now grabs one to 14.4% of income; we rank first in the nation for taxes on the rich and the top percent pay 47% of the taxes which cover half the state’s budget. Seven states impose no income taxes.

California mostly followed the Federal Revenue Code until 2015, so taxpayers submit 1040s with 540s. But California defied Trump’s 2017 Tax Cuts and Jobs Act with resulting complexities. Trump benefitted landlords and entrepreneurs more likely to vote for him with QBI deductions and higher standard deductions ($14,600 single or $29,200 MFJ in 2024).

But Trump raised taxes on a hostile salariat by limiting state and local tax deductions to $10,000 and eliminating most miscellaneous itemized deductions (e.g. union dues, investment expenses, tools and home office).

Charitable deductions get squeezed and California taxpayers usually itemize 1040s only with high mortgage interest. Furthermore:

On payroll W-2s, California deducts State Disability Insurance and income tax; hidden employer taxes are Unemployment Insurance and Employment Training Tax.
California has no special capital gains rates, so sales of stocks or rental housing are taxed proportionately higher, though CA does conform to section 121 gains exclusions on taxation for homeowners of up to $500,000.
The Republican Congress weakened Obamacare by eliminating penalties for failing to insure; California Democrats created a Personal Healthcare Mandate which penalizes the uninsured by at least $900 per adult, but with many exceptions. Consistently, they allow no Health Savings Account deductions.
California does not tax Social Security or unemployment income. CA offers a small renter’s credit and greater generosity in earned income credits.
California is more generous on casualty losses, mortgage interest and moving expenses.
California allows divorced alimony payors to deduct alimony, but this gives income to recipients. After 2019, divorcees lost federal deductions.

Some people may not like the region’s progressive politics, but today’s marginally higher state taxes really should not cause mass exodus. Yet an exodus of wealth and brilliant talent may hasten with fears of the California wealth tax proposal. Million-dollar earners already face a 1% surcharge for mental health services and this payroll tax now begins at $145,000.

The income tax, AMT and other taxes started with the rich then became more general. Now California threatens to tax wealth itself on the rich and even, for up to 10 years, on individuals and businesses who flee. The prospect of even higher CA taxes reminds me of the Ten Years After ballad:

“Tax the rich. Feed the Poor. ‘Til there are no rich no more.” —Alvin Lee

The Tax Foundation ranks California 48th lowest in overall business climate for taxes that are not only high but complicated and non-neutral. Poverty accompanies high taxes on the world’s fourth largest economy: Budgetchallenge.org ranks California number two under the Supplemental Poverty Measure, which considers cost of living. Do we purchase safer streets, efficient bureaucracies that rapidly issue permits and licenses, plentiful housing supplies and world-class schools?

Ignoring both party’s fantasies, this optimist enriches the “forgotten citizens” in public policy debates—taxpayers—right from my Santa Cruz Mountains paradise. Creativity abounds here. Flourish!

Robert Arne, EA, CFP, MS, of Carpe Diem Financial Life Planning, gives holistic financial advice as his client’s fee-only fiduciary. He serves mostly Santa Cruz Mountain dwellers. These articles must not be read as personal financial, mortgage, tax or investment advice; consult appropriate professionals.