Jim De Bree: The people’s Democratic Republic of ‘Taxifornia’

By James de Bree

Last update: Wednesday, September 13th, 2017

About twenty-five years ago, one of my clients was going public. They were the first real estate investment trust to have operations solely in southern California that sought to go public. The investment bankers were concerned that the California regulatory and tax environment was going to adversely affect the stock pricing of the IPO.

One day, one of the New York investment bankers asked me how much it was going to cost the company to do business in “The People’s Democratic Republic of Taxifornia.’”

I always remembered that term because it captures the essence of California’s fiscal environment.

Last spring, I attended a townhall meeting hosted by State Senator Scott Wilk and Assemblyman Dante Acosta. Messrs. Wilk and Acosta did a marvelous job of discussing the new gas tax increase and how difficult it is to provide a sane fiscal perspective in Sacramento’s legislative chambers.

The real point here is that the Democratic Party now has a supermajority in both houses of the state legislature that can pass any tax increase they want. The first example of this was the gas tax hike.

Everyone wants to see our highways improved, but a significant portion of the funds previously directed toward highway improvements were reallocated to other expenditures having nothing to do with state highways. To replace that funding for needed state highway repairs, the gas tax was passed by the Democrats, increasing our gas tax to the second highest rate in the country.

That is the basis of the objections expressed by Messrs. Acosta and Will. They believe that the original funding should not have been diverted from highway repairs. The clandestine exercise of moving funding away from needed repairs and then saying we need to raise taxes to pay for those repairs is rather devious. I fail to see why Californians from both sides of the aisle are not upset about this.

This discussion reminds me of the investment banker’s comment a quarter century ago, so I think it is important to put our state tax burden in a national context.

Our gas taxes (currently at 38.3 cents per gallon) are the nation’s eighth highest, but they will soon be the second highest at 50.3 cents per gallon. The national average is 31.4 cents per gallon.
California has the highest personal income tax rates in the country. Our corporate tax rates are .16% lower than the state with the highest rate, but the way that California corporate taxes are computed makes them the highest effective rate.

California’s state sales tax rate is 7.25 percent, which is the nation’s highest. However, when municipal and county sales taxes are added, the rate in many counties is 10 percent – among the highest combined state/municipal rates in the country.

In spite of Proposition 13, property taxes in the coastal regions of California are among the highest in the country because property values are so high. Homeowners in Los Angeles County pay the sixth highest property taxes in the nation.

When you add the other taxes, such as vehicle license fees, excise taxes, etc. clearly Californians are the highest taxed people in the country.
So how did we get here? California tax policy has changed dramatically since Jerry Brown first took office in 1975.

I recently had an opportunity to chat with a retired head of Oregon’s Department of Revenue who told me that both Oregon and California rely on taxes that are economically volatile. Both place an extremely heavy reliance on personal income tax.

Personal income historically decreases during economic downturns. In California nearly 54 percent of all tax collections come from personal income tax. When the economy goes south, tax collections drop precipitously. That is precisely the time when demands for government services spike.

The politicians respond by passing “temporary” tax increases to address the budget shortfalls. History shows that these increases tend to become permanent.

The most recent example of this was Proposition 30 in 2012, officially titled “Temporary Taxes to Fund Education,” which enacted a “temporary” increase in personal income tax on income over $250,000. Last year, voters passed Proposition 55 which extended the “temporary” tax until 2030.

Part of the problem lies in the fact that when the economy recovers, tax collections increase and government spending increases commensurately. Only recently has the concept of a “rainy day fund” been considered, but one has to wonder whether California has truly saved enough to effectively deal with the next downturn.

You may be wondering about my client that went public twenty-five years ago. They completed a successful IPO. In the early 2000’s they were acquired by another company who has since concluded that California is indeed a tough place to do business. Most of their California assets have been sold.

Jim de Bree is a retired CPA who lives in Valencia.

Click here to post a comment

Jim De Bree: The people’s Democratic Republic of ‘Taxifornia’

About twenty-five years ago, one of my clients was going public. They were the first real estate investment trust to have operations solely in southern California that sought to go public. The investment bankers were concerned that the California regulatory and tax environment was going to adversely affect the stock pricing of the IPO.

One day, one of the New York investment bankers asked me how much it was going to cost the company to do business in “The People’s Democratic Republic of Taxifornia.’”

I always remembered that term because it captures the essence of California’s fiscal environment.

Last spring, I attended a townhall meeting hosted by State Senator Scott Wilk and Assemblyman Dante Acosta. Messrs. Wilk and Acosta did a marvelous job of discussing the new gas tax increase and how difficult it is to provide a sane fiscal perspective in Sacramento’s legislative chambers.

The real point here is that the Democratic Party now has a supermajority in both houses of the state legislature that can pass any tax increase they want. The first example of this was the gas tax hike.

Everyone wants to see our highways improved, but a significant portion of the funds previously directed toward highway improvements were reallocated to other expenditures having nothing to do with state highways. To replace that funding for needed state highway repairs, the gas tax was passed by the Democrats, increasing our gas tax to the second highest rate in the country.

That is the basis of the objections expressed by Messrs. Acosta and Will. They believe that the original funding should not have been diverted from highway repairs. The clandestine exercise of moving funding away from needed repairs and then saying we need to raise taxes to pay for those repairs is rather devious. I fail to see why Californians from both sides of the aisle are not upset about this.

This discussion reminds me of the investment banker’s comment a quarter century ago, so I think it is important to put our state tax burden in a national context.

Our gas taxes (currently at 38.3 cents per gallon) are the nation’s eighth highest, but they will soon be the second highest at 50.3 cents per gallon. The national average is 31.4 cents per gallon.
California has the highest personal income tax rates in the country. Our corporate tax rates are .16% lower than the state with the highest rate, but the way that California corporate taxes are computed makes them the highest effective rate.

California’s state sales tax rate is 7.25 percent, which is the nation’s highest. However, when municipal and county sales taxes are added, the rate in many counties is 10 percent – among the highest combined state/municipal rates in the country.

In spite of Proposition 13, property taxes in the coastal regions of California are among the highest in the country because property values are so high. Homeowners in Los Angeles County pay the sixth highest property taxes in the nation.

When you add the other taxes, such as vehicle license fees, excise taxes, etc. clearly Californians are the highest taxed people in the country.
So how did we get here? California tax policy has changed dramatically since Jerry Brown first took office in 1975.

I recently had an opportunity to chat with a retired head of Oregon’s Department of Revenue who told me that both Oregon and California rely on taxes that are economically volatile. Both place an extremely heavy reliance on personal income tax.

Personal income historically decreases during economic downturns. In California nearly 54 percent of all tax collections come from personal income tax. When the economy goes south, tax collections drop precipitously. That is precisely the time when demands for government services spike.

The politicians respond by passing “temporary” tax increases to address the budget shortfalls. History shows that these increases tend to become permanent.

The most recent example of this was Proposition 30 in 2012, officially titled “Temporary Taxes to Fund Education,” which enacted a “temporary” increase in personal income tax on income over $250,000. Last year, voters passed Proposition 55 which extended the “temporary” tax until 2030.

Part of the problem lies in the fact that when the economy recovers, tax collections increase and government spending increases commensurately. Only recently has the concept of a “rainy day fund” been considered, but one has to wonder whether California has truly saved enough to effectively deal with the next downturn.

You may be wondering about my client that went public twenty-five years ago. They completed a successful IPO. In the early 2000’s they were acquired by another company who has since concluded that California is indeed a tough place to do business. Most of their California assets have been sold.

Jim de Bree is a retired CPA who lives in Valencia.

About the author

James de Bree

James de Bree

  • Ron Bischof

    Nicely done on your informative column, Jim!

  • Brian Baker

    Excellent, Jim.

    There’s another problem with so much of government funding being dependent on personal income taxes. One third of all the welfare recipients in the country live in California, along with 1/4 of its illegal aliens. Neither group contributes to that tax base; both groups greatly increase the cost burden on state government.

    • Gil Mertz

      There can be only one plausible explanation for your comment, Brian. You obviously hate poor people and immigrants. Forget the merits of your argument. The focus should be on what an evil person you are.

      • Brian Baker

        Yes, Gil, mea culpa. There’s no doubt I’m a xenophobic classist.

        I’m on my way out now to find some ashes to pour over my head.

  • Phil Ellis

    Good article, Jim. What you left unsaid is the future taxes we will need to pay to cover the runaway public pension problem that our legislators refuse to address. We are already feeling the pinch on our school budgets.

    • Ron Bischof

      A valid point, Phil. CA is on the Illinois road to perdition as well.

      Our de facto single party state simpletons believe tax increases are the solution. Every. Single. Time.

  • Brian Richards

    I can’t wait to leave.

    • Anthony Breznican

      Here’s your hat. Make haste!

      • Brian Richards

        I don’t require or desire your input. And once I and people like me leave and take our tax contributions with us, you can set up the nirvana like state you’ve always dreamed of. Nothing says statewide fiscal success like upper-middle class entrepreneurs leaving the state in droves taking dollars normally spent on state income tax, gas tax, car tax, sales tax, property tax, and many others with me. Yes, I will be paying taxes in another state, but that will be their gain and your loss.

        • Anthony Breznican

          We’re gonna miss you and your immense wealth. (Anyway, new homeowners usually end up contributing more to the tax base, thanks to Prop 13.) Have a great journey, wherever you chose to go. Lots of luck and good fortune! Sincerely!

          • Brian Richards

            I don’t have immense wealth and I continue to not require your input or your hope that I’m lucky. Unlike you leftists, I believe for the most part a person makes his own luck. People like you love to talk about income equality but not effort equality. And one day in the future when CA implodes because of it’s pensions, I will laugh and I will think of all the really smart people like you who elected the fools that run the state. When large parts of CA turn into Tijuana, other than the coasts where the elites like to pretend they are just like the little people, I will laugh some more. When CA, which has 10% of the population and 25% of the people in poverty in this country, become even more lopsided, I will laugh yet again. As someone who was born and raised in this once great state I can only take solace in knowing that the despair that people like you created will fall mostly on like minded people.

          • Anthony Breznican

            Yeah, like I said, you will really be missed. Such sunshine and optimism. That’s going to be hard to replace. And the way you can accept well-wishes with such grace! Truly inspiring. Best wishes as you go forth to “make your own luck.” I have no doubt your positive attitude and delightful manner will open many new and wonderful doors. ♪ “Just di-rect your feet, to the sunny side of the street.”♪

          • Ron Bischof

            One wonders if this sneering Leftist has ever built a business or met a payroll like yourself, Brian.

            Entrepreneurs like yourself are a big part of why California was called the Golden State.

  • Dirk McGivens

    This is why we need to vote out ALL the Democrats once and for all, our money is being wasted on assistance on those that aren’t in this country legally, business’s are leaving because of high taxes, and because you have to pay at least $15 an hour for MINIMUM WAGE, that’s crazy, all this will do is drive prices higher. Enough is Enough!

    • Anthony Breznican

      Hyperbole.

      • Ron Bischof

        Noting the content of your last few published pieces, that’s definitely your field of expertise, Mr. Breznican.

      • Brian Baker

        Pot, meet kettle, kid.

        LOL!