For those who didn't (or can't) read the article, the question being posed is--can they resist committing to additional recurring expenses in the face of a one-time windfall, not can they resist imposing a windfall profits tax on IPOs.
Domestic emigrants from California are actually mostly the less wealthy/less income earning residents who can't afford to live there anymore [1], so it's basically the opposite of what you're saying.
Every state and city has it's own challenges: TX is hot, Chicago has crime, Detroit lost way too many jobs, Baltimore is drowning in drugs, etc.
But CA is one of the few states that caused it's own problems: it's all self inflicted. Nearly all the problems CA has are due to it's inept voters/politicians: everything from prop 13 to the mountain of legislation inacted over the last 50 years to prevent housing from growing in a state that is actively attracting more and more people.
And, the situation is becoming increasingly dire. 19% SPA adjusted poverty rate, one of the highest in the nation (despite having the highest salaries of any state). this lack of wealth affects everyone living in CA, even those that already own a home (because it drives up the cost of everything else too), but especially those that don't own a home. Although millions have fled CA, it's still not enough.
It's due to the self inflicted nature of the problems that people don't have much sympathy for CA.
My two cents having lived in CA for 12 years now: it boils down to the general perception that we residents pay a lot of money to the state to live here with not a whole lot to actually show for it. Our infrastructure sucks, our public primary schools mostly suck, homelessness is out of control, wildfires, water shortages, and power brown-outs seem to hit every year, etc. etc. And on top of that, our tax dollars seem more often than not to go to projects that are blatant rip-offs to the public (see: the "high speed" rail project through the central valley). Also from personal experience, California is about the worst state in the country I can think of to start a non-tech small business for multiple financial and labor reasons.
Now, the reality is that California's monetary situation is complex and not entirely the fault of the legislature. Prop 13, voted in by the residents themselves 40 years ago, is a giant sandbag on the state's finances. California's wealth inequality is also frankly ridiculous [1] and causes a lot of problems. The vast majority of the state's residents are not wealthy and thus need a lot of support services from the state, so if you're a wealthy tech worker it seems like your money is disappearing, but a lot of it is going to support families who make less than a third of your salary. The state also runs some excellent colleges and a bunch of fantastic national parks, beaches, reserves, etc. that cost a lot of money.
The net result is that if you're a high income earner, libertarian-leaning, or generally entrepreneurial, your perception can easily be that the state is a wealth-sucking behemoth funneling your exorbitant tax dollars into homeless shelters and welfare programs while your friends in Texas live in shiny new houses on acre lots with swimming pools, tennis clubs, and places that let you actually shoot guns while paying no income tax. As always, though, the full picture is more nuanced.
If a large chunk of that goes to salary, and a large chunk of those salaries goes to SF's crazy-expensive housing...I think you know where I'm going with this. I'll admit I don't know what the actual numbers are, but if this thesis is true, the solution is right in front of them too - let housing become cheaper by permitting more construction. And possibly ending Prop 13. Mostly a combination of the 2.
You can see this in almost any labor-related expense in the Bay Area. Eating out is 30-40% more expensive than comparable metros, but you're not getting 30-40% more for your money. Ditto childcare, plumbers, electricians and other contractors, personal care, pet care etc etc.
The SF budget is roughly $11B but about half of that is already allocated to services that benefit the region - SFO international airport, water infrastructure, transportation. Fun fact, SF city/county doesn't pay for schooling in the city. That's paid for by the state.
Well, no, most of the multiple in the budget goes straight to higher labor costs in SF; government services are extremely labor intensive and extremely localized, so have a cost very much driven by the cost of local labor.
> Don’t think SF city workers get paid 50% more than in Seattle.
While I don’t have time (without getting paid for it) to do a comprehensive like-for-like comparison weighted to account for how much of the work is in each classification, they do very close to that at the bottom end (Seattle’s lowest civil service hourly rate is $10.54, SF’s is $15.) So I wouldn't be surprised if it was also approximately true across the board.
No, because local labor costs affect more of local government costs than just direct employment.
But another big chunk is that California has realigned a number of functions previously done at the State level (and still done by the state in other states) to counties (this includes certain portions of the State Medicaid program, and prison realignment, among the larger elements), plus San Francisco is a City and County, whereas Seattle is a city that is distinct from it's county, so a number of functions that in Seattle to would show up in the King County or the Washington State budget are covered by SF.
On one hand, I do agree things could be better. The DMV is an unmitigated disaster, and improvements could be made to public transportation, and so forth.
On the other, the Bay Area has some of the best weather I’ve ever had, has plenty of places to go and things to do, has some seriously great work opportunities for software developers, and hell, it may not be the best in infrastructure but it is Far from worst. I come from Detroit and at least public transportation here works. 3x the rent and 2x the taxes, sure; but quality of life is pretty good overall imo.
And honestly, I take no issue with much of my money going to social support. Shrug.
The problem is, your money really goes to landlords. The unaffordability of the state for regular people is the result of laws inhibiting housing growth, not because of general mediocrity of the populace.
To be clear, that was more regarding taxes than rent. While rent is about three times more expensive where I live now, I’d also say the complex I live in is quite high quality compared to where I rented before... so I know not all of the money is just being pocketed. Apartments here are clearly fighting for more big tech employees.
This pretty much nailed it except the part about the national parks. It's the federal government that supports them, not California. For me, the national parks in the state is California's only real redeeming quality and it's just chance that this state ended up rich in national parks
> it seems like your money is disappearing, but a lot of it is going to support families who make less than a third of your salary.
I would also add that it wouldn't be necessary to support many of these families if they lived in other states. California's well-intentioned but poorly thought out policies directly contribute to why many of these families need support in the first place.
> Prop 13, voted in by the residents themselves 40 years ago, is a giant sandbag on the state's finances.
Yes, prop 13 is a stupid piece of legislation. But it isn’t an insurmountable obstacle to good governance. Prop 13 made it impossible to have a reasonable property tax system, so California (and its subdivisions) should not rely on property taxes. Problem solved.
> Prop 13 made it impossible to have a reasonable property tax system, so California (and its subdivisions) should not rely on property taxes. Problem solved.
Hence California's high income and sales taxes, but both taxable income and consumption are more volatile than property values and more tightly synched with business cycles, which (given a Constitutional balanced operating budget mandate) makes countercyclical spending very difficult (further complicated by the lead time on bonds since they need public advance approval, which makes using the capital budget for countercyclical spending more difficult.)
You have accurately described the current state of affairs.
There have been a lot of unexpected knock-on effects. Among other things, it means Californian budgets swing wildly according to how well the local economy is doing. Another is strongly encouraging the permitting of offices over residences, further contributing to an already painfully low supply of housing.
I don’t believe the status quo is no property taxes in California. Despite the fact that the only kind that’s allowed is bizarre and broken, they are still in place.
Please accept my apologies. I can see I've been unclear.
The situation you call for, depending largely upon income taxes for government revenue, is the status quo in California. As you correctly note there are property taxes. However, they comprise a lower percentage of state revenues than is typical among states. This situation has produced the aforementioned side-effects.
I do hope that is clearer. Please don't hesitate to ask if you have any questions!
Stability is good for governments but bad for people. If you hold the tax amount steady and vary income (or wealth if you want to go that direction) then you are necessarily going to to have a less progressive and more arbitrary system than if you vary taxes with income/wealth.
Abuse is ok if you’re doing it to a disfavoured group that can plausibly be claimed to have greater social privilege on some access. For example if a black Yale graduate insults a white waitress that’s ok because as a white person she has privilege and he doesn’t. It’s a crass application of intersectionality theory, the only kind that exists in practice. It’s like the oppression olympics except it’s not a joke, the people talking about it are entirely serious. Abuse is ok if ...
I’m not saying it’s ok, just trying to answer the question. California is a place people love to live that’s been glorified by the media for decades, and is the seat of power of the ascendant tech industry. Of course people are going to bash it.
Even those in the ascendant tech industry, like myself, bash California because the California government not only does nothing to help the tech industry, they actively pursue policies that hurt the tech industry.
If anything, my taxes are being used to fund idiots in the state capitol that hurt the value of the equity compensation I get from my employer. I really wish my employer were located in any state but California. Paying high taxes for a government that actively works against your interests just adds insult to injury.
They are rubbing their hands because they see these high taxes on individuals as the bonanza of their low corporate tax policy.
The problem is that people hate paying taxes more than companies do.
I have many friends that work in late stage startups who are planning to move to secondary offices in Seattle or Austin just to escape an eventual California taxation once they can convert their options because of an IPO or an acquisition.
This by itself it's not a big problem, but California is so damn expensive that it starts looking pretty unattractive to future prospective entrepreneurs that can opt for other less expensive states to run their business.
Everybody has an anecdote, but the fact is that California continues to enjoy net domestic in-migration in the highest income group. Rich people do not avoid it because of taxation. They avoid other states because other states are terrible and they can afford to live here.
That's true partially. At least you have to segment extremely wealthy individuals from high-middle class individuals who don't care too much about this. Again this also anecdotal, but most people I know simply want a good quality of life at a reasonable cost.
At a certain point that stops being feasible if the cost of living keeps increasing and additionally you're taxed at the highest rates.
Also from an economic perspective, people will move close to where the jobs are. You hear a lot about startups hiring in the Bay Area but almost never hear the big incumbent businesses expanding there. Quite the opposite.
As with any macro-economic trend, it would pass years until you see the effects of these things, but I do believe that this doesn't play well for California's economy in the long-term.
Fortunately for California, there is more than Bay Area, so it's also possible that this is just a phenomenon applicable to the economic behavior and impact of the tech industry and tech employees.
Semi-related question I've had about California taxes: are they actually enforced for non-residents? And if so, how?
California non-resident taxes seem to be quite aggressive. Any income from "California sources" for non-residents is considered taxable, but "California sources" includes any income made while you're physically in California. So if you are a salaried employee and vacation in California and work in a coffee shop for a few hours, or if you go to a conference in California and don't take vacation days, you're technically supposed to file California taxes and pay for any income on those days, at least as I understand it. Yet I know many coworkers who have gone to conferences for a full week in California and not known about this at all, and definitely never filed or paid California state income tax. And they have never been informed of this, let alone gotten fined or served prison time or otherwise been punished in any way.
The apparent impossibility of enforcement makes me think that any non-residents paying California taxes who aren't uber rich enough to attract the attention of journalists are just fools. Or am I just misunderstanding the policy?
Not sure your details are right, but thought I’d add an anecdote. One year I was abroad at tax time and dutifully filed. Couldn’t pay CA tax bill though due to a security restriction at their site. Will pay later I thought. Six months later they seized my bank account for a month, which was just a tad inconvenient.
Maybe filing a extension would have been better, dunno was 10+ years ago. Did not know about restriction until last minute. Still, illustrates CA is not shy and billing people, rather taking money with both hands.
California payors report payments to non-Californians (Form 592), so California knows about your CA-source income.
Merely attending a conference is generally not "CA work" whether or not you take vacation days. If the CA FTB were to even think of deciding as such the Legislature would smack them down immediately because a silly rule like that would devastate CA's convention tourism industry. However, presenting at a conference is work.
Working in CA remotely while on vacation is technically CA source income, but unless your employer or you report it, CA has no way of knowing.
In many situations, there's also thresholds that have to be hit for CA taxation to apply.
> Merely attending a conference is generally not "CA work" whether or not you take vacation days.
Are you sure? A quote from the CA FTB website [1]:
> A nonresident’s income from California sources includes income from a business, trade, or profession carried on in California. If the nonresident’s business, trade, or profession is carried on both within and outside California and the part outside California is separate and distinct from the part within California, only income from the part conducted within California is California source income.
If you're a salaried employee and you're attending a conference in California and being paid for those days when you're attending, why wouldn't that be considered California source income?
> However, presenting at a conference is work.
You mean if you are getting paid for said presentation? I agree that that one is 100% clearly taxable by California and would probably have been reported to the FTB by the conference organizers. I'm talking about situations where you don't make any additional income beyond your normal salary paid by your employer. If you meant salary received during unpaid presentations too, I'm curious what you think would differentiate that from merely attending the conference for work.
Because it's not work... unless your job involves going to conferences. And if it was work then taking a vacation day to go to a conference on the company's dime would be taxable.
If you're in doubt you can just call the FTB. Despite what others are saying in these comments, they are actually quite responsive and helpful.
> Because it's not work... unless your job involves going to conferences.
Right, I'm talking about professional conferences related to one's work, otherwise presumably you'd be taking vacation days to attend them.
And what defines "work" if it's not whatever I'm getting paid for? Like, if I spent a work day sitting on my ass eating snacks and watching YouTube, that's definitely not "work" in the colloquial sense, but I doubt FTB would be happy if I tried to avoid paying taxes on my salary for that day because I wasn't "working". I'd think going to a conference is a far clearer cut case in the "work" column than that.
Right, I'm also talking about professional conferences...
I don't have the bandwidth to try and explain why attending a professional conference as a non-presenter isn't work but sitting all day watching Youtube at your office is for out-of-state tax purposes.
I will say this: of the literally hundreds of millions of people that have attended professional conferences in CA as non-presenters, the CA FTB has never tried to tax them. If that's not sufficient evidence for you to accept what I'm saying, nothing is short of you hiring a tax lawyer to explain it to you in detail.
I don't think your statement paints a full accurate description of the situation though. They don't tax on you on capital gains that happen once you become a resident of a different state. So even though you have to pay the AMT for the vested - exercised options, you don't have to pay taxes to California at the time of selling your shares (this is, in theory, the only thing that really matters because it's the event that allows you to convert your shares into cash).
I might be wrong, so for anyone curious just read the document linked above.
An article about CA taxes always has to include someone from the Howard Jarvis Taxpayers Association. This is the wonderful group that brought us Prop 13 and would turn us into Alabama if they had their way. Howard Jarvis stands for everything bad in CA. Gentrification, HOAs, paranoid city councils, and why the schools are so hit-or-miss. I wish journalists would let them fade away like Mr. Jarvis's acting career.
> The state budget relies heavily on the wealthiest earners; in 2017, the top 1% were responsible for more than 47% of the state's income tax collections.
Until I saw it in action (2001, 2008) I hadn't realized that a tax regime could meaningfully be too progressive. But this statistic quoted in the article results in a tax receipts whipsaw in hard times. If you have a lot of money and your income declines dramatically for a couple of years you don't need to lose sleep over it -- it'll come back and meanwhile you can live of your assets. The same doesn't apply to entities that need to live off their tax receipts: such a time calls for increased spending just when the money isn't coming in.
Lawmakers should resist treating this unusual surge of IPO tax revenue as an ongoing thing. It is an unusual occurrence that is unlikely to be repeated every year, or even every decade.
I reckon I'll need a couple million to retire in the next several decades. As I'm still pretty young I have a personal pension liability of a couple million dollars.
My point here, what's the practical impact of this number? It's a scary number that's thrown out a lot, but is this number going to break the budget, or will pension spending as a fraction of the total budget be fairly stable?
I don't think anyone really knows. A lot of it depends on the stock market - if it keeps going up, things will probably be fine. But if there's a big downturn it could wipe out a lot of money in the fund. At that point you could be looking at benefit cuts and/or tax increases.
The CalPERS money is invested. In recessions, the pension fund shrinks and tax revenues shrink at the same time. The fraction of government spending needed to cover pensions increases as a result.
In Los Angeles, the percentage of the city budget going toward funding of pensions is about 20%. Fifteen years ago, it was around 5%. Will it keep rising? What other spending is crowded out? etc...
Taxing founders and employees even more (on top of CA's very high income tax and capital gains) seems like a ridiculous proposal when corporate net taxes are low or zero in many cases.
California rewards property speculation and rent seeking with Prop 13; this is an untouchable source of inequality because landowning wealth is fiercely anti-tax.
The more tax-friendly stance of tech wealth means that tech money funds much of the state, while those who hoard land reap many unearned profits from rent seeking and increased property values, which directly pushes our so many of those with lower incomes.
Meanwhile the general attitude of the state is that tech is the source of the problems, rather than the conservatives who are unwilling to share their neighborhoods with new residents. It's quite an upside down view of the world.
Prop 13 was heavily pushed by businesses under the guise of “saving your grand parents from excessive taxes”.
What it actually is, is a tax cut for businesses (they don’t generally sell property, and so don’t ever pay tax on the actual property value), and land owners who rent/lease out property (because they can increase revenue in line with market value, while only paying taxes on increasingly far from market value properties). Given property taxes are generally used to fund a lot of public services (police, fire, schools, roads, etc) and a lot of those have costs determined by market value of property (eg cost of rent/mortgage is a significant determining factor for income), you end up necessarily pushing those costs on to individual tax payers. Businesses can easily incorporate out of state and so choose yet another cheap tax rate, pushing all of the costs into individuals.
It might be easier, politically, to add carve-outs.
Not your primary residence? Assessed value rises with CPI. Renting it out? Assessed value increases capped to e.g. 5% per year. Businesses with more than X in revenues or Y in employees? No price protection. Home value more than Z? No price protection. Et cetera.
> Not your primary residence? Assessed value rises with CPI. Renting it out? Assessed value increases capped to e.g. 5% per year. Businesses with more than X in revenues or Y in employees? No price protection. Home value more than Z? No price protection. Et cetera.
You'd need a CPA to figure out your annual property tax, and the exemptions would make tax evasion much easier.
> You'd need a CPA to figure out your annual property tax, and the exemptions would make tax evasion much easier
If you own a a second residence, are a landlord, are a large business or own an ultra-high value home, you probably need a CPA (or would be fine with this level of mechanical complexity).
Yes, complexity makes evasion easier. But that still beats the status quo where everyone is underpaying. Given how concentrated homeownership is in California, at least by value, it wouldn't be difficult to prioritise prosecution to yield a good bang for buck.
That's not what the article is about. The article is about how the California government should handle the large amount of tax revenue it is already receiving, under current tax law, from the IPOs that are happening this year.
