Battle of the Governors: Low Taxes vs. High Tans

By Teresa Ambord

The battle of words between two governors sounds a little like a schoolboy exchange. Texas Governor Rick Perry seems to be thumbing his nose at California Governor Jerry Brown. Brown is clearly annoyed, yet responding as if Perry is more of a mosquito than a threat. The issue? Now that California is the state with the highest tax rates in the nation, Perry has invited Golden State businesses to move to his Lone Star State. 
 
"Come check out Texas," said Perry. Texas has "low taxes, sensible regulations, and a fair legal system," to which Brown told reporters in California, "It's not a serious story, guys." 
 
Here's what happened:
 
In November, California passed Proposition 30, raising its top tax rate from 10.3 percent to 13.3 percent. Some wealthy residents, including golf pro, Phil Mickelson have spoken out, suggesting he's rethinking his address because of the tax increase that coincides with a federal tax hike of 4.6 percent. Fellow pro-golfer Tiger Woods left California years ago because of the high state tax, moving his wealth to Florida, also because of high taxes. 
 
With taxes in the spotlight, Perry is visiting key areas of California mid-February to host a reception for business owners who have contacted his office for information. In advance of that, a group known as TexasOne (non-taxpayer funded) ran a series of thirty-second radio spots targeting businesses. The ads include Perry saying, "Building a business is tough, but I hear building a business in California is next to impossible." 
 

It all boils down to this . . .

If you're wondering how much difference we're really talking about between earnings taxed in Texas and earnings taxed in California, take a look at the following hypothetical example, provided by CPA Robert A. Raiola. Raiola heads the Sports & Entertainment Group for the New Jerseybased accounting firm of Fazio, Mannuzza, Roche, Tankel, LaPilusa, LLC

Assumptions for 2013 tax return: A married executive, filing a joint return with his wife, no children. Earnings of $5 million; mortgage interest of $30,000 and real estate taxes of $10,000:
  • In California, his federal tax liability is $1,761,825, while his state tax liability is $628,142 for a total of $2,389,967.
  • In Texas, the same executive would have a higher federal tax liability of $1,965,781 (due to the lack of a state tax deduction available to the California executive), and no state tax bill. 
  • In spite of the much higher federal tax bill, the Texas resident still saves $424,186 more than the California resident.
 
Brown's response
 
The California governor blew the ads off, saying TexasOne only spent $24,000 on them so how effective could they be? He reminded his constituents that California promotes green energy industries and venture capital investment. 
 
"Do you think a few tricks from a politician are going to make any difference?" he asked reporters. "People invest their money where these big things have occurred. The ideas, the structures, the climate, the opportunity is right her on the Pacific Rim."
 
Brown went on to add, "Poaching doesn't work. This is something so many governors have done before and with the same ineffective results." 
 
Who's right? Both sides have legitimate advantages to claim. Many wealthy people are willing to pony up extra money to enjoy the sunny Pacific shores and the Hollywood glitz, plus they feel bolstered by the state's focus on green initiatives. 
 
Still, there's evidence, factual and anecdotal, that a money siphon is at work, luring people away from California.
  • California suffers a net loss of tens of thousands of taxpayers to Texas every year. Whether or not businesses will pull up stakes is uncertain, but they are responsible for new jobs in Texas. For example, Chevron, based in San Ramon, is moving 800 jobs to Houston. Facebook, eBay, and Visa, all based in the California Bay Area, have established expansion campuses in Texas. 
  • In a survey this month by the California Business Roundtable forum, 69 percent of companies admitted it's harder to do business in California than anywhere else, which may partially explain the state's very high 9.8 percent unemployment rate. 
  • Dan Morris, an accountant from San Jose, California, deals with wealth every day. He told reporters that since the passage of Proposition 30, there's a greater "catalyst burning under people" to leave. "There will be wealth that leaves California. Not everyone will move, but those who can, will."
  • Chris Plastiras, owner of Lakeshore Realty in Lake Tahoe and Incline Village, said since the November election, he's seen many of his wealthy clients flock over the border into no-state-tax Nevada. "They're buying fast and furious, absolutely. I've never seen anything quite like this. Prop 30 really got a lot of people upset." More than 50 percent of his closings since the election have been people leaving California. 

On the other hand, a Stanford University study showed California has the most millionaires per capita, while no-tax states have fewer than the average number of wealthy individuals. Brown and his supporters are counting on the fact that people love the Golden State, for the golden sun even if no longer for golden opportunities.

Both governors have good points. Texas is business friendly, but darn hot. California is tax heavy, but has more than 700 miles of breezy coastline. Maybe only time will tell if businesses can hang on through the high-tax storm hoping for better days, or if they'll trade their tanning lotion for cowboy hats. 

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