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Saturday, Jul 2, 2022
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OC LEADER BOARD

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California’s Department of Finance, which oversees the preparation of the state’s annual budget, made an interesting announcement in December. Between July 1, 2019, and July 1, 2020, 135,600 more people left the state than moved here. That continues a decade-long trend.

It seems a week doesn’t go by that someone whispers, “We’re moving to …” and they tell me the state.


Thinking about leaving yourself? You may be too late. The smart money may have already left, and they are driving up prices around the desired states, like Idaho, Nevada, Texas and Florida.

 
One key sign of the demand is that U-Haul on April 15 will charge about $1,080 for a two-day move from Irvine to Las Vegas. It’s only $241 for the same 20-foot truck to move from Las Vegas to Irvine.

 
Will California be harmed by this continued outmigration? Probably not.  


Why?  


Because it has Silicon Valley. A recent review of the S&P 500 found that six companies comprised nearly 50% of the Index’s value, and four of them were headquartered in California. Thank you, Apple, Alphabet, Facebook and Tesla. I am sure the other two, Amazon and Microsoft, have plenty of programmers in the Bay Area as well.


No wonder the Department of Finance just announced that the State’s General Fund revenues was $14.3 billion above January’s revenue forecast, with February’s receipts beating projections by $3.8 billion.


The poor cannot afford to pick up and leave.  

23% State Tax Rate

In Sacramento, the feeling is that the wealthy can afford the highest personal income tax rates in the nation, affectionately referred to as the “weather tax.”  
So, it must be the middle-class and young people that have thrown in the towel.  


Or is it?


Two years ago, I was chided by a Newport Beach resident who complained to me that he was paying 13.3% of his earnings to Sacramento. “And as my State Senator, I don’t like how the Capitol is spending my money!”  


Worse, he complained, with the Federal Tax Cuts and Jobs Act not allowing him to deduct more than $10,000 of his state and local taxes (SALT) on his income tax returns, his marginal tax rate was 23%.

 
“Why am I paying the state one out of every four dollars I earn?”


All I could tell him, as a member then of the Republican remnant in the Legislature, is that I had nothing for him.  


His response?  “Don’t worry—I just closed escrow on a $10 million mansion in Miami, Florida.”  


Florida has no state personal income tax.

Wealth Leaving the State

The fun part about running for public office is talking to friends who may be able to contribute to my campaigns. I called my friend in Miami. He observed, “John, there are so many moving to Miami from California, New York and New Jersey, my new place has appreciated 40% in the last two years.”  


A Leader Board last year noted that one entrepreneur from Brea told the Business Journal that if he dies as a resident of California, his family will lose $50 million.

 
I see wealth leaving the state. I just did lunch with another Newport Beach resident who sold his estate and is waiting for his new home to be completed in Texas.


Calling on another friend, I asked him how living in Nevada was working for him. “John, I own businesses in Orange County, California and in Arizona and Nevada. They are all doing well. My accountants informed me that it was costing $10,000 per day in personal income taxes to live in California.”  


He saved his family about $3.65 million annually by not living in California. That can buy quite a nice mansion in Nevada, and  $3,700 a night for a bungalow suite at Laguna Beach’s Montage Resort might be more reasonable than previously thought.


Wealthy individuals are mobile. And they are smart. They can see what portends in the Golden State’s financial future and it is not pretty. Worse, the tea leaves are not that difficult to read. Proposition 15, the split-roll tax increase, was narrowly defeated at the polls in November.  


Just like Proposition 10 of 2018, which tried to implement rent control, Proposition 15 will come back in the future like Proposition 21, another virtually identical rent control initiative, did in 2020.


Taxes on Move Up


With California suffering from an embarrassment of riches, despite the coronavirus pandemic, the state’s Legislature still talks about raising taxes.  


Last year, AB 1253 (Miguel Santiago-D-Los Angeles), attempted to raise the personal income tax rate from 13.3% to 16.8%.  


California does not provide capital gains tax relief. Unbelievable.  
High-net-worth individuals are taking note, especially those considering liquidating certain business assets to prepare for retirement. Yet, Assemblyman Santiago is back with a bill wanting to impose a surcharge on those earning $1 million or more.


Gov. Gavin Newsom’s selection for California’s next Attorney General is Rob Bonta, a Democratic assemblyman from Oakland. He introduced the proposed and ill-advised wealth tax last year with SB 2088. This idea comes from France and requires that you give a percentage of your worldwide net worth if it totals $30 million or more. Should you leave the state, it will still be payable to California for the succeeding nine years but decreasing by 10% each of those years.


With the new Biden Administration approving a $1.9 trillion stimulus bill and the president wanting to approve a $10 trillion infrastructure improvement package, there is talk of a variety of ways to increase the federal income and other taxes. Someone must pay for this deficit spending. With a 37% top federal tax rate on individuals, plus California’s 13.3%, California’s one-percenters voluntarily pay an extremely high weather tax. Until they do not.


It does not seem too unreasonable to anticipate more following the smart money to states with no personal income taxes and California becoming the proverbial house of cards. One Democrat legislator recently told Elon Musk in no uncertain terms to screw himself and he responded with a “duly noted” tweet of his own. He left for Texas. As has Charles Schwab, Hewlett Packard and Oracle. Orange County companies moving their headquarters out of state include First Foundation, NextGen Healthcare, Veritone, Healthpeak Properties, Tri Pointe, Mitsubishi Motors and Cryoport.


Sacramento does not appreciate the golden goose. San Franciscans are leaving the city/county by the bus load. Can Silicon Valley’s four giants keep up their valuations?

 
The Department of Finance may soon enjoy budget cuts reminiscent of the Great Recession days.  What remains of the middle-class in California will be left holding the bag.  


The weather tax might not be as tolerable as believed in Sacramento.

Editor’s Note: John Moorlach in 1994 foresaw the risks of Orange County’s investment strategy that eventually caused its bankruptcy. Since then, he’s held a variety of elected posts. Until he lost a state senate seat last November, he was the only state legislator who was an accountant. In March, he lost a race for the OC Board of Supervisors.  

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