Taxes on Taxes

It's property tax time in California. YAY!!  I looked at my bill very carefully, since, like a lot of folks, I'm watching my pennies these days.  What I noticed was downright shocking. The actual amount owed was 25% greater than the levy that would prevail under Proposition 13, which set a limit of 1% of assessed value.  The bill contained 12 additional "assessments", including one for "mosquito abatement'!

The bulk of the remaining assessments went to the public school systems. Interestingly, in 1984, the California Lottery was ALSO established for the express purpose of funding schools.

To be fair, all of these extra charges were voted for by the appropriate electorate in some form of referendum or special election.  So I'm not alleging "foul play".  I'm as guilty as anyone else. What I AM saying is that this has gotten so out-of-control that voters MUST pay careful attention when they vote on any future referendums. I know it's difficult because these referendums seem to be purposely written vaguely and most people simply lack the time to gain a true understanding.  And then, of course, there are the incessant commercials which are also, for the most part, misleading.


But tax quirks don't stop there.  One is a concept known as "double taxation", which is defined as two layers of tax. One common example is the policy on corporate dividends to shareholders.  Any corporation must pay these from "after-tax" earnings, while the recipient  is ALSO being subject to tax on the income received. By comparison, debt interest is paid out of "before-tax" earnings.  Countless examples of "double",  "triple", or even "mulitiple" taxation exist. 

THE major form of "multiple taxation" occurs with the personal income tax system.  Some people are taxed federally, by their state and even by their city. Typically, the state and city taxes are deductible against the federal. However, the social security tax is not. And, of course there are a host of smaller assessments, such as State Disability Insurance, that get tacked on as well.  Are you starting to think we desperately need tax simplification?

Next we have "surtaxes", which are an extra and ostensibly temporary tax on personal income.  President Johnson employed a "surtax" to help fund the Vietnam War and it was later repealed, well before the war ended. More recently, President Clinton passed a "surtax" on higher incomes only to have them rolled back by President Bush.

Currently, Charles Rangel, Chairman of the House Ways and Means Committee, is seeking a 5.4% surtax on certain taxpayers to fund the new proposed Obamacare. Despite the implication that they are "temporary", history has shown that they are very hard to roll back once enacted. While a fool and his money will be soon parted, the exception to that rule is politicians!

Another form of "double taxation" is the "Windfall Profits Tax".  It's defined as a higher tax imposed when some entity is deemed to be in receipt of a "windfall", such as the oil companies subsequent to sudden and substantial rises in the price of oil.  President Carter enacted one only to have it repealed by President Reagan. Another Federal "Windfall Profits Tax" has been proposed in light of the oil price rise last year and again now as oil prices have rebounded. So far, they have been defeated, but I believe that this potential source of revenue will be too tempting to not ultimately pass. 

Yet, in 2008, the state of Alaska DID impose its own "Windfall Profits Tax" on state oil.  That tax was approved by none other than Sarah Palin!

I'd like to wish everyone a Happy Thanksgiving, especially to those that are really struggling in this economy. We have major challenges ahead and I'll keep plugging away at raising public awareness as long as it takes.  But, no matter what, virtually everyone has something to be grateful for, and I hope that this brief holiday break gives you a chance to reflect on that.

I'll take some time off myself and return to the blog in a few days.  As always, I welcome opinions and comments, pro or con .  If  by some chance you're bored and have liked this essay, there are now a dozen to read in our easy to access archives. 

Marko's Take

California's Crisis Deepens... Part 1

California's financial situation is so complex it could fill up a book.  So, I'll begin with the way things stand NOW and, in Parts 2 and 3, I'll tackle other aspects, such as the ramifications to the state.


There has  been no shortage of talk regarding the worsening financial condition of the Golden State.  Increasingly, people are speculating that California will default on its debts.  Recently, Governor Arnold Schwarzenegger has stepped up the rhetoric by repeatedly warning of a default.  He has even contacted former Treasury Secretary Hank Paulson to ask for assistance in arranging an emergency Federal loan of $7 billion.  This was reported in the LA Times last week when a copy of the email correspondence was obtained.


John Chiang, the State Controller, publishes official records at his website (http://www.sco.ca.org/.). According to the most recent report, Chiang notes that the year-to-date deficit is already up to $794 million and he provides breakdowns of which sources of revenue are up and down. Since California's fiscal year starts July 1, a deficit that large so soon is quite troubling.  He notes some positive items, though.  For example, sales taxes were UP last month and even UP year-over-year.  He also acknowledges the positive impact of "Cash For Clunkers", but that program was temporary. What Chiang does NOT acknowledge in the latest report, is that only one month earlier, he warned the Governor and other lawmakers quite starkly of the emergency conditions that were prevailing.

California recently enacted a significant increase in withholding taxes and, it is believed, that state finance officials intend to issue "IOUs" to anyone receiving a  tax refund.  This would be at least the fourth time "IOUs" have been used.  The problem  is that an "IOU" is a form of currency which, in California's case,  carries a yield of 3.75%. Given the state's problems, they may ultimately prove to be worth FAR LESS than face value.  At the moment, a small trading market has evolved, but apparently, a few banks are still honoring them. So for now, no sizable discounts that I know of exist. However, there are numerous reports of opportunistic buyers bidding as little as 85% of face value on places like Craigslist.

There is historical precedent to what the true market worth of "IOUs" might become, albeit from the 1840's.  The states of Indiana and Michigan and the city of Chicago all issued some form of scrip, or "IOUs", only to have them ultimately drop to 40% of their original value.

If you listen to independent sources, the budget situation is far, far worse than Chiang implies. Very recently, The LA Times reported that a study by a man named Marc Taylor, who is described as a "non-partisan Legislative Analyst", estimated that over the next 18 months, ANOTHER $21 billion in budget deficits would be realized. The reality is that no one really knows how bad the deficit will actually become because of all of the constantly moving pieces. It is even conceivable that the deficit could go LOWER.

Finally, I want to re-iterate that  Fitch, a respected rating agency, has given California a BBB rating, shared only with Louisiana.  A rating of BBB is barely above junk bond status. Only one month ago, California tried to sell $4.5 billion worth of bonds to help finance its deficit.  The issue size had to be scaled back by nearly 10% despite a hike in yields.

I hope this gives you a small glimpse into just how tragic the state's financial situation has become.  Next Monday, in Part 2 of this series,  I  intend to cover the likelihood of  California's potential descent into bankruptcy. As for tomorrow, my topic will be "Taxes On Taxes".  Meanwhile, I hope you keep coming back and review some of the other topics we've covered.  Your feedback, pro or con, is always welcome.

Marko's Take