Did California Hit Mickelson into a Tax Sand Trap?

By Teresa Ambord

Top professional golfer Phil Mickelson may be ready to leave California and go house shopping in a more tax friendly state, which only leaves him forty-nine choices. 
 
"If you add up all the federal and you look at the disability and the unemployment and the Social Security and state, my tax rate is 62 . . . 63 percent. So I've got to make some decisions on what I'm going to do," Mickelson told reporters. 
 
Just a few months earlier, he was a member of a group that set out to buy the San Diego Padres. But in December, he abruptly announced he was out, partly because California just passed legislation that pushed taxes even higher for some people. When reporters asked if the tax hikes influenced his decision, Mickelson replied unequivocally, "Absolutely." 
 
Golden State Tax May Lose One of Its Golden Egg Layers
 
California now has the dubious distinction of being the state with the highest top marginal tax rate for residents considered "wealthy." Thanks to the passage of Proposition 30 last November, rates for those earning over a million dollars rose from 9.3 percent to 12.3 percent, retroactive to the beginning of 2012. That's not all. There's another 1 percent for the same income level, which is called a "mental health surcharge," bringing the rate up to 13.3 percent. For 2013, add to that the increase in federal tax rates on higher income individuals, and the extra 3.8 percent Medicare tax, and that's a bundle of money to leave on the table. 
 
For CPA Robert A. Raiola, the tax issues that celebrities like Mickelson face are an everyday concern. Raiola heads the Sports & Entertainment Group for the New Jersey-based accounting firm of Fazio, Mannuzza, Roche, Tankel, LaPilusa, LLC. Using an estimated income of $45 million for each year for Mickelson, he ran the state and federal income tax numbers, and here's what he found:
  • In 2011, an effective rate of 41.6 percent for a combined tax of $18,716,085.
  • In 2012, an effective rate of 43.5 percent, for a combined tax of $19,578,810.
  • In 2013, an effective rate of 49.6 percent for a combined tax of $22,310,231. 
The 2013 figures include the new provision that restricts the amount of state taxes that can be deducted on a federal return. Mickelson's estimate of 62 or 63 percent is much higher, but it includes other taxes, such as disability and Social Security. Whatever the real total percentage, the bottom line is he will still pay close to $3,000,000 more in taxes this year . . . if he remains a California resident. 
 

Ronald Reagan, the Actor and Tax Protester

Back in the days when Ronald Reagan was acting, his displeasure with his own crippling tax bill may have inadvertently spurred his interest in politics. Unlike modern-day tax protestors (Wesley Snipes, for example), Reagan had his own way of dealing with it.

He was under contract to earn $400,000 for every movie he made. Not bad money today, let alone in the 1940s. But once his total earned income crossed the threshold of $750,000, his tax rate soared to a heartburn-inducing 90 percent.

Soon Reagan developed his own tax management policy. That is, he refused to make more than two movies per year. Once his self-imposed limit was reached, he said he simply "loafed around." Decades later when he occupied the Oval Office, he asked his chief of staff rhetorically, "Why should I have done a third picture, even if it was Gone with the Wind? What good would it have done me?"

During his Hollywood heyday, Reagan was youthful and full of energy, yet due to his curtailed movie career, he had too much time on his hands. That's when he turned his attention to politics. His political views were shaped by his contempt for what he considered the class warfare tactic of punitive taxes on high-income working people of the 1940s. 

Then as now, the taxpayers who pay the most are those who, like Reagan, make enormous incomes by working for it as opposed to those for whom earned income is an insignificant part of a vast fortune.

 
Tax Hikes May Be a Fat Shot
 
As Mickelson watches more and more of his income go to backfill the California budget hole, he's wondering – out loud – if it's still worth it to hustle like he has in past years. Barack Obama said that at some point, we must ask ourselves whether we've made enough money. Individuals like Mickelson with high-earning potential but a dwindling net income may be ready to say "enough." 
 
Of course, the point of the tax hikes is to remedy the budget woes, but that won't happen if producers lose their incentive to produce. Certainly California needs the tax dollars from high-income earners like Mickelson, although the actual revenue from golf isn't huge compared to other sports revenue. The California State Franchise Tax Board reported that tax dollars attributable to pro golfers was about $6.85 million out of a total of $171.7 million for all sports combined (in 2010).
 
Is Mickelson alone in his frustration with California state tax? PGA Tour Commissioner Tim Finchem told reporters, "Generally, people making decisions based on the tax rates in California, on top of the federal rate, is not a unique thing." In fact, fellow golfer Tiger Woods took his millions elsewhere. "I love California," he said, "but I live in Florida." 
 
A study by the Manhattan Institute, entitled The Great California Exodus: A Closer Look, estimated the last decade has seen about 225,000 taxpayers take their wealth out of the state every year, to the tune of about $14 billion that now resides in Nevada, Arizona, and Texas. 
 
Just weeks ago, popular French actor Gerard Depardieu staged his own revolt against the incoming new tax hikes on wealthy individuals. In the face of much criticism, Depardieu went so far as to surrender his citizenship in favor of becoming a Russian citizen, which has a tax rate of around 13 percent. Mickelson won't have to give up his US citizenship, but he may take his earnings to a state with a softer tax bite. 
 
Mea Culpa
 
Wealthy Californians have been exiting the state in search of lower tax rates for years now. Many go quietly, as is their prerogative. Few have been as clear about their frustration as Mickelson, and that's creating a stir from fans and some in the media.
 
After his public comments drew a lot of fire, Mickelson apologized for spouting off. He said it was a "big mistake" to go public with his frustration, though he didn't retract his views or apologize for what he said, only for going public. It's nothing new for celebrities to air their views on everything from politics to how we dry our clothes (dryer vs. clothesline). It happens every day and seldom does anyone apologize. But Mickelson did, saying, "I think it was insensitive to talk about it publicly to those people who are not able to find a job, that are struggling paycheck to paycheck. I think it was insensitive to discuss it in that forum." He added that he's never had a problem paying his "fair share." 

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