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Schwarzenegger

I’m guessing that Gov. Schwarzenegger thinks something very different when he sees this slogan these days: The thing that won’t die, in the nightmare that won’t end.

It’s not the Terminator but rather, the budget.

The state of California is facing a $21.3 billion shortfall. Billion.

And the measures that Schwarzenegger hoped would be a step towards resolving those issues failed – and failed miserably. Voters in California voted down five of six proposals on Tuesday with more than 60% of voters issuing a resounding “no.”

The one proposal that did pass prevents certain state officials from receiving pay raises when California has a budget deficit. But other measures failed. The controversial proposals included shortening the school year by a week and a-half, cutting education jobs, eliminating health insurance for nearly 250,000 children, laying off state firefighters and limiting funds paid to local governments.

Cuts are inevitable now. So are higher taxes. Just months after California cut billions in spending, raised the state sales tax by a penny, borrowed and yes, begged, from the federal government, the state is expected to once again raise taxes. This time, income taxes are the likely target.

But wait… Before you start writing those “what did you expect from California?” comments, consider this statistic: 33 of 50 states have either already raised taxes or are considering raising sales, income and/or excise taxes to make up shortfalls in their budgets. My own state, Pennsylvania, is one of them.

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Welcome to my fifth in a series on state taxes! For information about what I’m trying to do, read my introductory bit. Next on the agenda, the state that we’ve all heard a lot about this year when it comes to taxes: California!

CALIFORNIA

Population: 36,756,666 (1st)

Capital: Sacramento

Largest City: Los Angeles

Gross Domestic Product: $1.812 trillion

GDP per capita: $38,956 (11th)

2008 election winner: Barack Obama

web site: http://www.ca.gov/

Income Tax

California does collect personal income tax. Taxes are fixed according to a series of six brackets (like Arkansas!), depending on net income. In 2008, the lowest tax rate was 1%, with increases to 2%, 4%, 6%, 8% and the highest rate at 9.3%. California also assesses a 1% surcharge on taxable incomes of $1 million or more, which effectively raises the top tax bracket to 10.3% – the surcharge is referred to as the Mental Health Services Tax.

California residents must file an income tax return if either their gross income or their adjusted gross income (AGI) is more than the amount defined by law. California residents must consider their total worldwide gross income to determine their filing requirement (yeah, you kind of get the feeling that bit is there to keep those Hollywood folks from stashing their cash elsewhere to avoid taxation).

California residents are generally taxed on the same income that they report for federal income tax purposes. In fact, California AGI is defined as federal adjusted gross income from all sources reduced or increased by all California income adjustments.

The failure of Proposition 8 during the last election appeared to complicate filing for gay and lesbian couples. Same sex marriages performed in California between June 16, 2008 and November 5, 2008 will be treated as valid marriages for California tax purposes. However, Proposition 8 passed on November 4, 2009, and provided that “only marriage between a man and a woman is valid or recognized in California.” Since California had enacted SB 1827 as law in prior years, couples who are considered registered domestic partners may use the RDP/married status; this does not affect filing status for federal purposes.

Just to make it even more complicated, California is one of nine community property states.

Social Security and Railroad Retirement benefits are exempt from taxation and a 2.5% tax applies to early distributions and qualified pensions. All pensions are fully taxed.

California does participate in the Treasury Set Off program. A California state tax refund will be taken to satisfy any outstanding liabilities owed to California or to the Internal Revenue Service; a federal refund will be taken for same.

Sales Tax.

California imposes a state tax of 7.25%. The total tax rate may be higher than 8.25% depending on the district and local taxes that apply.

Sales tax is imposed on most retail goods and some services. Some items are exempt from sales tax, including:

  • Sales of certain food products for human consumption (many groceries)
  • Sales to the U.S. Government
  • Sales of prescription medicine and certain medical devices
  • Sales of items paid for with food stamps

Tobacco Tax

California’s cigarette tax is 87 cents per pack pack, currently the 31st highest in the country. There is a proposal – being met with much resistance – to raise the tax on cigarettes by $1.50 in 2009, to $2.37 per pack. The national average now stands at $1.20.

Tobacco products, which include all forms of cigars, smoking tobacco, chewing tobacco, and snuff, as well as other products containing at least 50% tobacco, not including cigarettes, are subject only to the cigarette and tobacco products surtax. That rate is currently 45.13%.

In California, the cigarette excise tax revenue is used to fund tobacco control programs.

Gas Tax

The gas tax rate in California is $.455 per gallon. It is the highest rate in the country.

Property Taxes

California does impose taxes on real property based on the assessed value of the property. Property tax bills show land and improvement values. Improvements include all assessable buildings and structures on the land.

The maximum amount of tax on real estate is limited to 1% of the full cash value. Some exemptions apply.

Prior to 1912, California derived up to 70% of its revenue from property taxes. The state no longer relies on property taxes as its primary source of funds, though it collects $33 billion in property taxes per year.

Inheritance and Estate Tax

California does not impose an inheritance tax or a gift tax. Like most states, California no longer has an estate tax since it was tied to the federal estate tax state death tax credit.

Overall Tax Burden

The overall tax burden in California, taking into account taxes paid by individuals, results in a ranking as 6th most-tax burdened state in the country, according to Tax Foundation. This is a couple of steps down from its 4th place status in 2007.

taxgirl says

If the tax burden in California as a whole seems high, take a look at this statistic: in 2004, the richest 3% of state taxpayers paid approximately 60% of all state taxes. And while you’re probably thinking Hollywood dollars, you might be surprised to learn that a relatively high percentage of the tax revenue in years past has come from capital gains taxes. Capital gains taxes, you say? Don’t forget that a disproportionately high number of tech companies are located in California. And those tech companies tend to offer stock options as compensation, not only to execs but to regular employees. In 2005, for example, 14 of Google’s top executives and directors sold $4.4 billion worth of stock last year, according to Thomson Financial. Billions. From 14 people. Who cares about Steve Martin and Gwen Stefani when you have Sergey Brin and Larry Page?

Governor Arnold Schwarzenegger (Republican) has preached fiscal responsibility but is still planning to raise some taxes to fill a gaping hole in the state budget. Even with a high tax rate, California depends on the feds for extra funding – but not as much as other states. In 2005, California citizens received approximately $.78 of federal spending for every $1.00 paid to the Treasury, putting them near the bottom of the list (43rd).

But they’re getting more… So far, more American Recovery and Reinvestment Act (Recovery Act) dollars have been awarded to California than any other state: nearly $13.5 billion. The second state in line received $4 billion less. With deficits looming, Schwarzenegger has made no secret of the fact that his state will take money that other governors may pass on.

The fact that California is struggling in a more visible way than many other states shows you how terribly reliant the state is on its own tax system. With a heavy emphasis on tech companies and the entertainment industry for a resident tax base, the state has been acutely affected by the slowdown in the economy. In particular, property tax revenues have taken a steep dive as foreclosures increased. In years past, housing prices had skyrocketed, temporarily boosting revenues (remember that assessments affect the tax due). However, the incredibly high cost of living took a toll: the ratio of housing costs to income was calculated at three times higher in California than in the rest of the country. When the “bubble” burst, it burst hard: in the first 3 months of 2009, California reported more foreclosures than any other state.

As revenues climbed, California’s expenses have increased. Many conservatives blame the increased expenses on the number of immigrants crossing into California: One in four Californians is an immigrant, a higher proportion than any other state (note the link is a pdf). Most California immigrants are from Mexico – Mexican immigrants to California outpace the next nearest country (Philippines) by a factor of 6. Note that these are all total immigration figures and not numbers of illegal immigrants.

Health care and education comprise the largest percentage of expenses in the 2008-2009 California state budget (note the link is a pdf). Next, with an increase of more than 50% from last year, are business, transportation and housing.

Critics of the Governor’s proposed budget note that the state is increasingly relying on the top taxpayers to pay for the lion’s share of expenses. When you include welfare spending and the like, California ranks 47th of 50 in economic freedom, according to a study by the Pacific Research Institute (PRI) – up a couple of ranks from the prior years.

With the changes in the budget, it’s back in line with the 2005-06 fiscal year, but that was at the height of the housing bubble. With the state’s dollars buying less than before, it will be interesting to see what’s in store for the Golden State. More budger cuts are certain… More taxes, too?

(Note: tax rates were current as of 04-20-2009 and were taken from the CA Board of Equalization)

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A number of Republican governors have indicated that they will turn down federal money offered to states as part of the stimulus package. The Republican governors of Alaska, Idaho, Louisiana, Mississippi, South Carolina and Texas have signaled that they will pass on the money because it could lead to a tax increase in the future.

Governor Arnold Schwarzenegger (R-CA) had a message for them: We’ll take it. As California seeks to dig itself out of a fairly deep economic hole, Schwarzenegger said:

I am more than happy to take his money or [that of] any other governor in this country that doesn’t want to take this money. I take it because I think California needs it.

Schwarzenegger does not believe that the provisions in the stimulus package will result in an increase in taxes in the near future. But my own Governor, Ed Rendell (D-PA), begs to differ. He told “Fox News Sunday” that “I’m not sure that we can, over the long run, cope with the high unemployment compensation standard that this mandates for states.” He did, however, say that Pennsylvania would be taking the money anyway.

What exactly is the hubbub about? In the stimulus bill, federal dollars can be used by the states to expand their unemployment insurance program. However, if the states take the money, they must agree to expand the number of people who are given jobless benefits. That, some say, will be a problem once the federal money runs out (of course, that assumes that the current unemployment rates remain largely the same, which we hope is not the case in a few years).

So, that’s the end of that, then, right? Not really. The law allows a state legislature to overrule a governor’s decision not to take the money.

Hmm. What if I say that I don’t want the money because of the potential for debt down the road… when I know that the legislature will take it anyway? Ooh, those clever political strategists…

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