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Shame on me for voting for a retroactive tax in Prop 30 (danielodio.com)
35 points by drodio on Dec 17, 2012 | hide | past | web | favorite | 64 comments

"When our politicians do something like this to us, it makes me want to become more conservative, and just never vote "yes" to anything that could have -- and in this case, did have-- hidden gotchas no matter how principled the ideal might be."

It sounds like you're looking for reasons to become more conservative.

It has been quite clear to all residents that the state of California has been in trouble for a couple of years now. Teachers being let go en masse, school districts seeing cuts in state funds, and state services from campsites to the DMV being cut.

The text of the Prop. 30 tax increase was originally finalized in March 2012, was sponsored by the Governor, and received a big push from him. The original text of what became Prop. 30 was developed by the Governor in 2011 (http://ag.ca.gov/cms_attachments/initiatives/pdfs/i1035_11-0...).

If you're significantly affected by this increase in marginal tax rates (an extra 1% for individuals over $250K/couples over $500K, up to 3% for individuals over $500K/couples over $1M), you should be aware of these issues, or be paying someone who is.

While your points may be entirely true, in my opinion they are no excuse for failing to make clear the retroactivity of the proposition.

The real WTF (that you, me, and the OP probably agree on) is the California initiative process, which forces/allows citizens to act as legislators.

But to your point, the first substantive link off the official Prop. 30 summary page (http://voterguide.sos.ca.gov/propositions/30/analysis.htm) makes clear in several places that the increases will take effect starting Jan. 1, 2012. ("Because the rate increase would apply as of January 1, 2012, affected taxpayers likely would have to make larger payments in the coming months to account for the full-year effect of the rate increase.")

If the OP was worried about taxes, he should feel lucky that 38 failed ;-).

"The real WTF (that you, me, and the OP probably agree on) is the California initiative process, which forces/allows citizens to act as legislators."

I definitely agree with this (-:

You're right, in that a reasonably informed voter should have known the nature of the proposition. Unfortunately, due to the broken initiative process, those weighing the options tend not to be sufficiently informed. In my opinion (though not that of the US Supreme Court, see Calder v Bull), such ex-post-facto tax laws should be as prohibited as similar laws are in criminal circumstances.

We're continuing to digress, but I have to imagine that the framers of the (generally successful) US constitution must be having a laugh at the expense of the framers of the (less successful) California constitution regarding the initiative process.

It was pretty clear in the voter's pamphlet. See the bottom of page 29 and the top of page 30.

Almost everything I heard about Prop 30 mentioned that it would affect all income earned in 2012. It's hinted out in the summary that the OP posted and spelled out more concretely just below that overview:

"Increases Personal Income Tax Rates From 2012 Through 2018."

(from http://voterguide.sos.ca.gov/propositions/30/analysis.htm).

While it is unfortunate that some feel mislead, the impact is quite small in 'real' terms. The married filing jointly bracket up to 500k will see a 1% increase in state income tax, up to $600k will see 2%, and above a million will see 3% incremental.

If you sold your company and got a million dollar check, you'd see something like $10k in additional taxes (which is then partially offset by claiming them on your federal tax forms). Price of doing business in a high-tax state I suppose.

It appears that the author is upset that his post-liquidity tax planning has been up-ended by prop 30.

His argument only applies to entrepreneurs who have had an exit in 2012, and little to no income before that. This is a pretty narrow group.

As an entrepreneur who moved back to California recently - the poor school systems of California were more of a deterrent to living here to me, rather than tax burden. Prop 30 addresses that.

The referring article by Ethan Anderson [1] tries to extend this group of entrepreneurs to early employees of Facebook for example. However, most early employees do get paychecks and didn't have to "sacrifice" any more than employees at non-pre-IPO companies.

[1] http://allthingsd.com/20121204/what-proposition-30-means-for...

Prop 30 doesn't address the bad schools in California. We have a big union problem: http://www.bloomberg.com/news/2012-04-23/new-california-taxe...

High taxes, big deficits, and bad public services - California state government achieves the trifecta of suck.

Prop 30 did address bad schools by avoiding "trigger cuts" of 6 billion dollars in 2012-13 [1] $5.4 billion to K–14 education and $500 million to public universities.


You don't have a union problem, you have a direct democracy problem.

None of the big unsustainable pension increases involved ballot measures, as far as I know. The unions are the biggest spenders in California election and incumbency is rampant even when the state is going down the tubes.

Then tell your local officials to grow a backbone.

If incumbency is rampant, that's a structural problem with your redistricting process, not the unions.

If BigCo Inc is allowed to spend a ton of money in elections, why can't the unions?

"This is a pretty narrow group."

Depends on your definitions.

"entrepreneurs who have had an exit in 2012, and little to no income before that" -- Pretty narrow.

"People expecting fair treatment from their fellow citizens" -- Not narrow at all.

Retroactive law of any kind sucks. As the point of law is to provide rules to guide conduct, "retroactive law" is something of a semantic nullity -- it cannot possibly guide behavior because its guidance is not knowable as people behave. It is little more than than infliction of a legislature on some population, under the color but not the substance of law.

Your freedom and property depend on our general refusal to apply such law to you, no matter how much we may want to. Absent that general refusal, you depend on your absence from sets any set of people from which we might want to apply such law.

If you are confident that you will be the same as everyone else on all important dimensions, you should be safe without that general refusal. If you've any ambition to be different in any important way, maybe you should consider your interests more broadly.

“Retroactive law of any kind sucks.”

Pretty sure that if our Washington politicos can't reach a deal by 12/31, whatever tax law IS set in 2013 will apply to the entire calendar year. As that will likely mean a significant tax decrease from the current law (under which the “temporary” Bush tax cuts expire), you won't find many people sympathizing with your complaint.

Now if you want some sympathy, go with the fact that our state legislature refused to fund essential services, services that the populace wants and needs, due to a minority that blocked balanced budgets again and again. Which led to (a) Prop 30, and (b) the electorate cutting the Republican nihilists off at the knees.

Now that we have a respite, let's get the amendment process going so that we no longer need the 2/3 vote in the legislature to pay for what a clear majority of citizens want.

And if the people whose incomes have benefitted the most from doing business here would rather set up their entrepreneurial shops in Mississippi or some state that has lower educational commitments (but low taxes!), they just proved that they weren't smart enough to have actually earned that high income, anyway, and just got lucky. Let 'em go. Better yet, encourage them to move to Texas and secede so that they won't have to worry about all the immigrants here, too.

This is tinkering with marginal tax rates, not retroactively making peeing while standing up a felony.

More seriously, there is a distinction between civil and criminal ex post facto laws (civil, including taxes: generally OK if there is a rational basis; criminal: essentially never due to Article 1 of the US Constitution).

For more, see http://en.wikipedia.org/wiki/Ex_post_facto_law#United_States

"The power to tax involves the power to destroy." John Marshall, McCulloch vs Maryland

People are so cute when they threaten to leave California because their taxes are a little bit higher.

He is likely taking advantage of the long term capitals gain tax already, reducing his taxes from 35% or so to 17% or so.

That was my reaction as well, but after reading a bit more about it, it appears California taxes capital gains as regular income. This bill might as well have been called the "taking money from Facebook investors" bill... combined with the federal capital gains rate, most startup IPO beneficiaries are going to pay ~30%.

Wisconsin faced a similarly grim[0] fiscal situation three years ago - high public union labor costs and years of structural deficits plus the recession resulted in a deficit of over 20% of the budget.

It was ugly and underhanded, but as many will remember the Governor successfully pushed through very unpopular[1] public union and budget reforms. It sucked, but it worked. We're now firmly in the black[2].

There are probably negative consequences that we'll learn about at some point, but at least the state resisted the urge to just raise taxes and not deal with its largest problem. California could learn a thing or two.

[0] http://www.jsonline.com/news/milwaukee/69771807.html

[1] http://en.wikipedia.org/wiki/2011_Wisconsin_protests

[2] http://www.jsonline.com/news/statepolitics/state-to-release-...

TL;DR: "I voted in favor of taxes on people making more than $250,000 per year because I thought it wouldn't include me."

@hvs, not accurate.

More like:

TL;DR: "I voted in favor of taxes on people making more than $250,000 per year because I thought it wouldn't apply retroactively to decisions made in the past."

I can see now why one would assume differently, but it has always kind of been my assumption that if a change to the tax code was approved before the end of the tax fiscal year, that the changes would possibly affect my taxes for that tax year. After all I always received tax breaks in the same year that they were approved.

We're very bad at managing money. The only solution is to give us more money, while we hold your children's education hostage.

Being a proposition, does the legislature have any responsibility involved in the unfairness of this retroactive tax? Isn't the responsibility of a proposition in the hands of the voters, thus making it really important for voters to do their research? The blog post should be laying the blame on us voters.

This is interesting because, since it was a referendum vote, the people who passed it will likely not be affected by it, unless the average income in Calif. is much higher than I would assume.

Yes, that's likely a good part of why this was voted in and why Prop 38[1], with its tax increases on anyone making 7,316 or more, wasn't.

[1] http://ballotpedia.org/wiki/index.php/California_Proposition...

This is obviously not the first or last time this type of measure will be passed ;).

Now that makes it even more interesting (not shocking, but interesting). I wonder how many examples of referendum-style laws are approved in CA where voters are voting against self-interest (or at least with non-trivial skin in the game) for Utilitarian benefit.

Prop 30[1] was an initiative[2] so it went directly to the people for petitioning and then voting. The legislature was kept out of the loop.



I didn't realize this was a retroactive tax either, but does that really change anything? I mean, if you made a bunch of money in 2012, would you have decided to not earn that money simply because of a slightly higher tax burden? I keep hearing this argument that entrepreneurs would decide not to do such-and-such action that makes money if the taxes on that money were raised, but that's never made sense to me. I mean, they still make money. They make slightly less with the taxes raised, but that slightly less is still a vast improvement over the near-zero interest rate on just letting your money sit in a savings account.

You're making the mistake that thinking they'll lower their income to avoid an increase in income tax means they'll make less money for the year. If the accountant says that because of the oddities of the tax code it's possible to exit the year with more money after taxes by lowering their income, you better believe they'll do it. But don't necessarily think they'll make less money overall, it's just that their reported income will be lower.

Why do you think all those CEO's are so nice to accept a $1 yearly salary and take stock instead?

So, in the end the guy still gets enough money to make him happy and tax revenue goes down.

The other popular option is to just move, which some countries in Europe are now experiencing.

Does raising the tax burden slightly on a particular bracket affect the presence of loopholes like this?

I wouldn't necessarily say they are connected, but they could be. If lawmakers change the tax code to increase the tax burden then it's possible they will introduce new loopholes. The Federal tax system is incredibly complicated and sometimes it seems that just reading the table of contents causes new loopholes to magically appear. Often times I think that simplifying the tax code would result in higher revenue even if you lowered the percentage on each bracket.

I know that when Obama originally threatened the progressive taxation, there was a contingent (I don't really know how large) of people whose incomes were 'on the bubble', or had incomes of between (let's say) $250-$255k who would have netted more bring home money by grossing less.

I mean, the 'more money' argument certainly applies once you've crossed the bubble threshold, but if you're making $251,000, if the additional tax is only 1%, that translates to $2,510, which takes your gross to under the $249,999 you could have made and been exempted from the increased tax.

For the self-employed, who have more control over their direct income, it might be more beneficial to take a slight pay cut and come home with more until you're able to give yourself a significant enough raise for it to not matter.

Edit: I've been corrected by others who are more savvy on taxes than myself. I admittedly am not in the >250k tax bracket, but regardless, there is a contingent of people who are also wrong, and are working their taxes in the way I described.

Perhaps you have never actually had to deal with the "incredible crushing burden" of a high tax bracket, but it does not work that way. The tax does not apply to all earnings, only the earnings over a threshold. If you cross the threshold then it is all earnings over that threshold which are taxed at the higher rate; in your example someone who made 251000 would pay the higher rate only on the $1000 over $250000.

That's not how income tax in the US works- each bracket applies to money made over a certain amount, so if you are earning 251,000, you would pay 35% (or maybe 39% in the future) tax only on the $1000 over 250k.

Marginal taxes don't work that way. If the additional tax is 1%, and you make $251,000, then you pay 1% * 1000 = $10 extra compared to not having the tax.

Good grief.

First, marginal tax rates are taxed on marginal income, not gross income. The $250K bracket only kicks in for dollars earned over $250K.

Second... there are, in fact, points on the income ladder with a marginal rate that is greater than 100%. But they're not a problem for the rich. They're a problem for the poor. At certain points, the removal of things like food stamps and tax credits can result in a marginal tax rate of greater than 100%, which is to say, you are literally better off making less gross income, because you will have more spending power.

That sounds pretty insane, I thought the standard thing for a progressive tax system would be to apply the extra tax% only on the income above the treshold? So an increase in income would never result in a decrease in net income, only a slightly "slower" increase in net income?

It is. The poster is just parroting moronic right-wing talking points.

I was misinformed. It happens.

Thank you for your understanding.

It sounds to me like this person didn't read the proposition before voting yes on it. I voted 'NO' for the proposition because it was going to be retroactive and because after discussions over the proposition with my friends, I decided that these additional taxes would only have negative effects on the Californian middle class. ($250k is middle class in California!)

There is no excuse for being lazy. Sorry to be so harsh, but yes, shame on you.

$250k is not middle class in California. See https://en.wikipedia.org/wiki/American_middle_class. $250K is upper middle class at the most.

>$250k is middle class in California!

You might think this is true, but you're wrong.

As usual, depends on where you live. Most of the time when I see that $250k tossed around it's in reference to couples. Typically for a single person it's $200k. So a couple only has to reach $125k income each to be taxed at that rate. In some parts of the country it's not hard to imagine that two people can reach that and not be particularly wealthy based on local cost of living.

But as you say, I would imagine for most of California this isn't an issue.

You're off by a factor of 2.

The extra 1% tax kicked in at $250K for individuals, $500K for couples filing jointly.

That's very well-off anywhere in CA. Median household income in SF County is $73K, and SF County is quite rich compared to the state median of $61K.

This idea of retroactive taxes may have legs. Rich people can often reconfigure their future earnings in response to upcoming changes. But they can't change past income – or even better, income from years whose returns have already been filed. Perhaps the revenue-hungry states will discover that the only tax increase that can't be skillfully avoided is one on already-admitted income, say from 2009. Or to pick a real bumper year for California tax revenues, 1999.

If this happened in a large enough scale the result of the lawsuits surely to be filed to combat it would be interesting.

Scary thought though, considering being able to assign a retroactive tax in such a way. Doing a retroactive tax that reaches back to the beginning of the current year is one thing, reaching back to previous years after taxes filed and paid are another.

Yes, CA has a reputation for poor public schools and for large class sizes. And yes, CA now has the highest, or among the highest both personal income tax and sale tax. Where does all this money go? Are other states able to do more with less?

California is the worst run state in the nation[1] largely due to its politically dominant public sector unions[2][3] and the resulting massive pension deficit[4] that result from the state funding lavish pensions at early ages for its public sector union members. The state's liberal ideology exacerbates the problem - the Republican Party is small and weak, so there is no real political opposition to the one-party state.





A couple places. One is that we do have a large number of social programs that other states do not have. Second, we have the highest population of any state in the nation and that means a huge burden for instruction of students (We have enough people that we're like the 35th largest population in the world or something silly like that... meaning out of entire country populations).

Additionally, we pay out more than we get back from the nation-state. I don't have the exact numbers off-hand, but it's something like 75/100 per dollar or maybe even less now.

All those fantastic public K12 schools in red states are made possible with federal education spending that is made possible by California (and to a lesser extent other blue states like New York and Massachussetts).

California receives back less than $1.00 in federal spending for every dollar its citizens pay in taxes, while the smaller states receive back in federal spending significantly more than $1.00 for every dollar their citizens pay in federal taxes. In effect, California's largesse subsidizes the rest of the nation. If California received back in federal spending its fair share of the federal taxes its citizens paid, it would have a multi-billion dollar surplus each year.

First off, I agree with the statement about states like California paying more in Federal taxes than what they receive in Federal moneys back. I'm not sure how I feel about that because it can sometimes be a complicated thing that has issues in how our Federal government spending and taxation works.

But, isn't that the system that so many in the "blue" states advocate? Taxing money from those that have it to distribute it to those who do not? Consider that most "red" states don't have the state resources, for various reasons, that the others have. It would seem the citizens of the "blue" states would be proud of such a Federal system that is so similar to what they wish to do within their own system.

Here's the 2010 list for that point (From taxfoundation.org):


California gets back $.78 for every dollar in federal tax that its citizens pay.

I was actually surprised that Michigan was on the 'under' side of the list but there were few other surprises.

Yep... I think it's like 75 cents on the dollar (which I wrote a bit earlier). Pobre California.

Although arguably it's a good thing that we're not setting Missouri on fire until they pay us back the way Germany is treating Greece.

I really don't see Prop 30 as the entrepreneurship killer its critics make it out to be.

Why does nobody point out that in the event of an exit, an entrepreneur has control over the timing of their income? Sure, I suppose some subset of people who sold an inordinate amount of stock in 2012 now have to pay more, but how much more? Doing the math, it seems this tax likely increases ones tax bill by roughly 5%.

If you believe a 5% decrease in take-home proceeds from successful outcomes will stop entrepreneurship, I've got some swampland in Florida to sell you.

If you move your company to Portland or Austin one year before your exit, you'll take home an additional 13%, I think. That's significant.

Because your site won't take a guest comment, I'll leave it here:

"Smaller amounts of additional revenue would be available in 2011-12" should have been a clue that something hinky was going on.

This is why you always read the full text of a bill, not just the summary prepared by someone with an agenda that you may or may not be aware of, and may or may not be in agreement with.

The real error is voting on any proposition on the California ballot, full stop.

I give your troll-fu a -5. There are good propositions and bad propositions. The onus is on the voter to decide what, if anything they should be voting on. In a state as large and as diverse as California the prop system is both a huge benefit or danger. I think it's much like a democracy in general.... you get out of it what you put into it.

Voting on propositions is a cause of California's sclerotic politics. The legislature is no longer capable of governing because its fiscal hands have been tied by the initiative process. If you think California is well governed then by all means keep signing the petitions and voting on the referendums.

Well let's get something clear here. Are you hating on prop-13 or something else? I don't think there are many people at this point that think prop-13 is/was a good idea, but look at it this way... we have the prop system, let's get our act together and get it changed (and use the good part of having it).

I don't admit that the public has a direct interest in setting fiscal policy. That is what our republican representatives do. Except, in California, they are prevented from doing anything useful by a) term limits and b) the constraints placed on governing by the imbecilic initiative process.

I would vote on the initiatives that set the ground rules for governance -- things like redistricting. But the idea that modifying the state constitution as cheaply and easily as it can be modified would lead to better government, well … no.

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