Taxing Times in Montecito
Beware the Ides of April – the time when the Federal and State tax men cometh to collect their share of the money needed to pay for next year’s government follies. Here are some taxing takeaways for Montecito residents:
The ZIP Code List
Montecito is too often associated with Oprah Winfrey, large estates, and the fabulously wealthy. The wealthiest ZIP code in California is Atherton (94027) with a Median Household Income of $226,414 per year, followed by Palo Alto (94301 and 94304), San Francisco (94104, 94111 and 94129), Los Angeles (90067 and 90177), Portola Valley, Los Altos, Beverly Hills, Santa Monica, Newport Coast, Los Gatos, Pacific Palisades, Encino, and Belvedere-Tiburon.
Montecito (93108) is ranked at #18 with a Median Household Income of $112,833, which is greater than the City of Santa Barbara’s $71,160, and twice the national Median Household Income of $61,372, but far from the most affluent in California, let alone the nation.
Sharing the Wealth
In 2016 – the latest year available for accurate federal tax data from the IRS – the top 1% of taxpayers paid more in federal income taxes ($538 billion) than the bottom 90% combined ($440 billion). The top half of earners paid 97% of the income taxes collected while the bottom half of earners paid just 3%. In 2018, an estimated 44% of all Americans paid no federal income tax, up 2 percentage points over the year before. It seems clear that the so-called rich are paying their fair share of income taxes.
The Trump Tax Cut
The President’s tax reform lowered individual and corporate income tax rates. It increased the standard deduction to $24,000 for married couples and $18,000 for Head of Household. The mortgage interest deduction was capped at $750,000 instead of $1 million. It doubled the Child Tax Credit from $1,000 to $2,000 per child. The mandatory requirement to enroll in Obamacare was repealed. By capping the federal deduction for state and local income, sales taxes and property tax deductions at $10,000, Montecito homeowners with high incomes and expensive homes will feel the pain of losing their most important federal deductions in a high tax state.
Overall, the Heritage Foundation using IRS data, estimates that the average American household can expect a $1,400 tax cut this year, and a family of four will get a $2,900 reduction.
California, New York, and New Jersey routinely compete for last place in the race to the bottom for the highest tax states, with California usually winning the bottom rung.
State Income Tax: California holds the honor of the highest state income tax rate in America. Nearly half of California’s income taxes are paid by the wealthiest 1% of earners, for whom the top marginal rate is 12.3%, with an additional 1% charge on incomes over $1 million.
Sales Tax: The Golden State has the highest sales tax in the nation at 7.25%. Adding local sales taxes jumps the combined sales tax rate to 8.55%. In some California cities, the additional local sales tax pushes the combined rate to over 10%.
Gasoline Taxes: California has the 2nd highest gasoline tax in the country at 55.5 cents per gallon, exceeded only by Pennsylvania at 58.7 cents per gallon. California is the only state that taxes carbon emissions. It plans to eliminate all use of fossil fuels – natural gas, oil, diesel, and nuclear.
California Property Taxes: Thanks to California’s famed Prop 13, California’s property tax rates are restrained. The state has an average effective property tax rate of 0.813%, compared to a U.S. average of 1.192%. However, despite California’s Prop 13, actual property tax dollars collected are high because of the high value of homes and the high cost of construction in California.
The Business Climate
Once again in 2018, for the 14th straight year, California ranked dead last in Chief Executive magazine’s annual Best and Worst States for Business survey of the nation’s CEOs. Repeatedly, California is hammered, ranking 50th in taxation and regulation, 35th in workforce quality and 26th in living environment, which includes cost of living, the education system, and state and local attitudes toward business.
Comments from the CEO survey include, “While business remains good for the high-tech, entertainment, and tourism industries, California’s high taxes, thickets of regulations, and other policies have diminished the quality of life and made California unaffordable. This has crippled business in California, especially for those without strong political connections.”
“California just doesn’t get it. At the rate they are going, who’s going to pay the bills for anti-business, leftist government? It’s a crazy environment for small businesses out there.”
“Organized labor has more political influence in local and state government than in other states. State employees have reached a critical mass where they become a permanent lobby for growth in government.”
One key indicator of a state’s business climate, according to Chief Executive Editor-in-Chief J.P. Donlon, is “whether your state is one of the 26 states that has a right-to-work law, which prevents employees from being compelled to join or pay dues to a union. Eight of the states in the top 10 ranking of the Best States for Business are right-to-work states. All 10 Worst States for Business are forced union states,” Mr. Donlon observed.
How California Compares
Alaska has no state income tax nor state sales tax. Instead, thanks to its oil and natural gas industry, each legal resident who has lived in the state for a full year receives an annual “Permanent Fund Dividend.” This year, each legal resident will receive $1,600, down from a peak of $2,072 in 2015, reflecting lower oil production. Average local sales taxes are a tiny 1.43%. Anchorage, Alaska’s largest city, has no sales tax. Gas taxes and fees stand at a paltry 15 cents per gallon.
Florida has no state income tax. It has an average state and local sales tax rate of 6.8%, well below that of California, and a relatively modest 41 cents per gallon gas tax. Florida’s property taxes are below the midpoint for the U.S. Notably, Florida is one of only two states to exempt cigars from all taxation, a reflection of its long history as a cigar-manufacturing location.
Nevada is a no-income-tax haven for corporate and individual income taxpayers. Where does the Silver State get its money? Besides the gaming industry, much of it comes from sales tax – the average combined state and local sales tax rate is 8.14%. Gas taxes and fees amount to 34 cents per gallon.
South Dakota has no corporate or individual income taxes. Average state and local sales taxes are 6.4%. Gas taxes and fees are 30 cents per gallon.
Tennessee has no broad-based income tax and is phasing out its tax on stock dividends and interest income, known as the Hall Tax. While gas taxes are only 26 cents a gallon, the state and local sales taxes average a high 9.46%. Groceries are taxed at 5% by the state, plus local taxes.
Texas has no income tax at all. Average state and local sales taxes are 8.17%. Fuel taxes are a modest 20 cents per gallon.
Washington is one of seven states with no personal income tax. State sales taxes are 6.5% but city sales taxes can add another 3.9%. Fuel taxes are on the high side at 49.4 cents per gallon. Washington was the first state to legalize the recreational use of marijuana, which is taxed at 37%; it also has the country’s highest liquor tax at $32.52 per gallon.
Wyoming is the tax poster child for all other 49 states. It has no corporate or individual income tax, and its gas tax is well below the national average of 31 cents per gallon. The property tax is the ninth-lowest in the U.S. While some states with no income tax make up for lost revenue with higher-than-average sales taxes, Wyoming’s combined state and local sales tax rate of 5.39% is effectively the lowest in the U.S. Gasoline taxes are a modest 24 cents per gallon. At 2 cents per gallon, Wyoming has the lowest beer tax in the land. Generous revenues from taxes on mineral and energy extraction allow for low taxes.
The fundamental question for taxpayers in California is whether its residents want to pay more taxes for a bigger government, or pay less tax for fewer entitlements and less intrusion. As Thomas Jefferson so wisely noted, “I predict future happiness for Americans, if they can prevent the government from wasting the labors of the people under the pretense of taking care of them.”