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Income Tax Rates Do Matter

By   /   January 31, 2013  /   Comments

1220 South Ocean Boulevard is for sale.  But it is not cheap.  In fact, Business Insider has called it the second most expensive home available for sale in Florida.  For the asking price of $75 Million dollars, the buyer will receive 9 Bedrooms, 10.5 baths, a pool, an expansive view of the intercoastal waterway and a dock for your yacht.  And, located on Palm Beach Billionaire’s row, you’ll have some fairly exclusive neighbors.  But for the right buyer, the state of Florida is willing to give this house away for free.

Well, not exactly free.  But if you’re Phil Mickelson, it would be like it was free, only better.

Mickelson created a bit of a stir creating the public faux pas of complaining about his new tax rates.  Many of us have, as nobody likes to give the government “just a little bit more”.  But with Californians deciding that “the wealthy” can solve their problems, combined with the New Year’s fiscal cliff tax package both increasing the top federal marginal tax rate and limiting the deductibility of state income tax, Mickelson now faces a marginal income tax rate of over 50%.

But back to the free house.  Mickelson now faces a 13.3% state income tax rate courtesy of California voters.  There weren’t public referendums from voters asking to receive less government benefits in hard times.  Instead, they decided they should all keep getting what they’re getting, and that only a select few should pay a little more.

In Mickelson’s case, that “a little more” now totals $8 Million per year based on his $60M earnings (courtesy of Sports illustrated) and California’s new top 13.3% marginal tax rate.  Sooner or later, even if you’re making tens of millions, that “a little more” starts to be real money.  And in Mickelson’s case, it could pay the mortgage on that nice mansion on Billionaires row.

At today’s interest rates, the amount of taxes that Mickelson would pay to California would service a 30 year mortgage – including principle, interest, taxes, and insurance – for roughly $100 Million worth of debt.  Mickelson could buy the Florida mansion, declare residence there, and STILL have enough left over to pay the mortgage on a $25 Million home in California for when he would like to visit.

Differences in tax rates matter.  As we have seen with several new internet billionaires who have recently sought citizenship in other countries, eventually the price of “just a little bit more” becomes a financial decision that distorts even the most basic of behaviors.  For those who are constantly told they will pay “more”, eventually they will find a way to pay less.  And often, to a different government entity that thought they would get to expand services on the backs of a small portion of the population.

While few of us will ever relate to Mickelson’s income or tax dilemma, the effects are the same.  Imagine you’re instead earning at a lower level.  Take two zeros’s off and divide in half.  That’s a two income couple each making $150,000.  In San Francisco, that’s barely middle class.  In Atlanta, that’s two professionals at mid career.

Now imagine recruiting that couple from the tech center around Palo Alto to a new location where you want to attract them and those of their emerging technology industries to your town, and you do so by offering them a $500,000 McMansion, free of charge.

That, exactly, is the recruiting tool the states of Florida, Tennessee, and Texas currently have over Georgia when trying to recruit business here.  At 6%, Georgia’s income tax is less than half of California’s top tax rate.  But we would only give them half of that half million dollar home.  Two of our neighbors and several other states would give them the whole thing.

There are proposals pending before the Georgia legislature to phase out the state income tax.  To do so would require significantly raising the state sales tax.  The issue has pros and cons.  But as we continue to try to attract industries with high wage earners, we have to consider that our neighbors have a built in advantage of what their citizens can buy with their salaries given the disparity between the states.

Charlie Harper is the Atlanta based Editor of PeachPundit.com, a conservative-leaning political website. He is also a columnist for Dublin Georgia based Courier Herald Publishing.

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