Ultra-Wealthy OK with California's High Tax?
by Terri Eyden on
By Teresa Ambord, Correspondent
Are the superrich leaving California? The Huffington Post (HuffPo) says no. Sure, there's a lot of talk, says HuffPo, but most of it is anecdotal, or rich people crying wolf, or as one guy said, "those rich people are just very slow packers."* Despite the big talk, the ultra-wealthy don't seem to be going anywhere. But that doesn't mean the state isn't losing income and jobs.
HuffPo cites a report done by Stanford University that said filthy-rich residents (as opposed to the merely rich) generally stick around. After all, California has sunshine, beaches, 735 miles of coastline, the glitz of Hollywood, the culture of San Francisco, plus the technology of the Silicon Valley. So if paying more than 60 percent (when you add federal, state, Social Security, and Medicare) of your income in tax still leaves you filthy rich, you might choose to call California home.
HuffPo also noted a report from UBS (Union Bank of Switzerland) that says California was the "largest absolute gainer" of the superrich between 2012 and 2013. The report, called Wealth-X, says "the highest-income Californians were those less likely to leave the state after the millionaire tax was passed."
However . . .
California is still heavily populated, and while the ultra-wealthy may stay, is their money enough to keep the Golden State afloat? There's plenty of evidence that jobs and a large chunk of personal income are leaving California for more tax-friendly states.
US Expats Throw in the Citizenship Towel
Wealthy US citizens have been living abroad forever, and for many reasons. Climate, culture, anonymity, and in some cases, a friendlier tax policy.
One tax attorney in Connecticut is keeping a close eye on how many US citizens are forfeiting their rights of citizenship. By the end of the third quarter of this year, 2,369 individuals have called it quits. This may not sound like much, but it's a 33 percent jump from the next highest record set in 2011, when 1,781 expatriates gave up citizenship.
Among those names you might recognize are Tina Turner, Denise Rich, and Eduardo Saverin.
Why the outflow of citizens? Those who forfeit their citizenship don't have to give a reason when they renounce, so short of hearing it directly from them, it's not possible to be sure. According to at least one source, it doesn't seem to be an immigration issue. Freddi Weintraub, an immigration specialist at Fragomen Worldwide law firm, told the Wall Street Journal, "Nothing has changed in immigration law that would make people want to renounce. Current or anticipated changes in tax law and enforcement are driving this increase."
Also, the Foreign Account Tax Compliance Act will take effect in 2014, greatly increasing the paperwork burden on US taxpayers living abroad . . . another possible reason why expats are saying enough is enough and throwing in the citizenship towel.
Pro golfer Phil Mickelson may not qualify as superrich – he only earns tens of millions every year, mostly in endorsement income. When California raised its personal income tax to the highest level of any state, Mickelson made his annoyance clear. He talked about moving to Florida, where the golf courses are at least as nice and there's no personal state income tax. But family ties have caused him to stay put . . . so far. Fellow pro golfer Tiger Woods also protested California's high tax back in the 90s, and he did move his wealth across the country to Florida.
Then there's the data from the IRS. The tax agency issued a report showing from 1995–2010, California lost a bundle to no-tax states. Here's just a snippet from that report:
During the years studied, nearly half a billion in personal income was lost to King County in no-tax Washington State. The income siphoned from California came from three counties:
- $32 million from Sacramento County
- $98 million from Orange County
- $313 million from Los Angeles County
Keep in mind, this isn't the total income loss, it's merely the income drawn from three of California's fifty-eight counties that went to one Washington county.
Still not convinced?
Sure, people flock to California because it offers a lot of glamour. But a report earlier this year from the Tax Foundation shows California (and other states) lost a sizable chunk of personal income – to the tune of $29.4 billion – to other states as people moved elsewhere, even before the recent tax hike. This report only suggests that tax might be one cause of the migration.
Other sources show the Golden State suffers a net loss of tens of thousands of taxpaying citizens every year to no-state-tax Texas. And while some businesses based in California haven't pulled up stakes and moved their entire operations out of state, they are sending jobs outside California's high-tax, business-unfriendly borders. For example, Chevron, in San Ramon, California, is moving 800 jobs to Houston. Three major companies in the California Bay Area – Facebook, eBay, and VISA – are also expanding to Texas.
In a survey earlier this year 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 high unemployment rate, hovering around 10 percent.
Dan Morris, an accountant from San Jose, California, serves mostly wealthy clients. He told reporters 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."
Then there's Chris Plastiras, the owner of Lakeshore Realty in Lake Tahoe and Incline Village. Plastiras said since the November 2012 election, he's seen many of his wealthy clients flock over the border into no-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.
So although HuffPo made a valid point – that is, the superrich seem to be okay with paying the highest state tax in the nation in exchange for life in California – job creators and the merely wealthy are not so okay with it, and they're taking their money and their jobs elsewhere. Good thing the ultra-rich are staying, because if this trend keeps up, it will be just them and the super-poor.
*Quote from Kevin Roose of New York Magazine, taken from the Huffington Post.
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