So if you win the $640 million jackpoint, how much does Uncle Sam get?

So if a person happens to win the $640 million Mega Millions jackpot and is the only winner, how much will that person have to pay in taxes? 

It depends on where you live and whether you take the lump sum payment option but if you live in NYC, and opt for the lump sum payment of $462 million you could end up paying as much as $199.5 million in fed/state/local taxes. 

Headlines Indicating That 64% of Californians Support Gov. Brown's Tax Hikes are Likely Overstated

Recently, a USC Dornsife/ LA Times poll was released, which amongst other things, gauged Californians' interest in increasing taxes under Gov. Brown's revised ballot initiative.  As a result of the poll, headlines proclaimed things like "Strong majority backs Jerry Brown's tax-hike Initiative" and contained opening statements such as "Sixty-four percent of those surveyed said they supported the measure that the governor hopes to place on the November ballot." 

However, once one digs a little deeper into the poll questions itself and its findings, it is readily apparent that the claimed support of 64% is likely overstated. 

First, keep in mind that the relevant poll question was question # 41 on the telephone, to which 750 people responded.  This means that in all likelihood, respondents were on the phone for nearly 30 minutes by the time this question was asked.  (I'm not really sure who is willing to sit on the phone for 30 minutes to answer these types of questions, but apparently people do.) 

Second, where did this 64% percent figure come from?  Well, its made of two components.  In reality, 39% of respondents said they "Strongly favored" the ballot initiative, whereas 25% said that they "Somewhat favored" the initiative.  To me "somewhat favoring" is no guarantee that that person will actually vote in favor of it come election time.   

Third, the poll question itself is confusing and not entirely accurate.  The question reads as follows (bear in mind that this is being read over the phone):

"Increase the state sales tax by half a cent for four years and increase the state income tax rate for people earning more than 250,000 dollars a year for five years, gradually increasing the rate for higher incomes, with a two percentage point increase on those earning more than $500,000 dollars a years.  As much as 7 billion dollars a year would come from these new taxes.  The money would go towards public schools and community colleges and to local governments for their new public safety responsibilities"

Not only is the question long-winded, but it creates the impression that all these tax revenues are going to go towards schools and public safety.  However, that isn't necessarily the case as one of the biggest complaints against the Brown plan is that the funds go to the general fund.

California's may or may not support Brown's tax plan, but to cite to this poll to argue that 64% of Californians support the plan is misguided. 

Do we have a revenue problem, or a spending problem?

One of the never ending debates regarding the national deficit is whether we have a spending problem or whether we have a revenue problem.  Each side has dug in their heels.  In reality, mathematically speaking, no side is inherently correct.  To cure deficits you either have to decrease spending, increase tax revenues or both.

William Voegili argues over the last 40 years, tax revenues have kept pace with economic growth, whereas spending has increased dramatically.  His article includes this handy graphic below.  His article also delves into where we are now spending our tax revenue and how that has changed over the years.

Today it's a penalty...tomorrow a tax?

There were quite a few interesting exchanges today during day one of the Supreme Court's hearing on the health care reform act and whether the individual mandate penalty was or was not a "tax". 

The government was boxed into a difficult position because it had to argue for purposes of the AIA that the individual mandate penalty wasn’t a tax, but tomorrow it will take the exact opposite position and say Congress passed the law under its taxing authority. Its position is further complicated by the fact that the administration still wants the court to consider the law jurisdictional, or binding on all federal courts.
At one point Breyer corrected U.S. Solicitor General Donald Verilli after Verilli had repeatedly referred to a “tax.”
“Why do you keep saying `tax’?” Breyer asked. Verrilli then referred to the “tax penalty.”
“The penalty,” Breyer insisted.
“Right, that’s right,” Verilli said.

Will California's Bullet Train Be Solyndra Times Seven?

Chris Reed has a must read article in the City Journal pointing out some of the extreme revenue assumptions made by  the California High-Speed Rail Authority.  For example, back in 2008, the rail authority claimed that once the L.A. to San Francisco line was complete that ridership would be a whopping 117 million passengers a year.  Currently, that projection has now dropped to 44 million passengers per year.  But even under this lower estimate "44 million passengers would be 50 percent higher than the number of people Amtrak caries to and from more than 500 stations in 46 states and three Canadian provinces each year."  So where did this estimate come from?  Incredibly, it was premised on future estimated gas prices of $40 per gallon.  In addition, the public-opinion polls that were used to gauge the public's interest and potential ridership were questionable as 96% of those polled were already train riders who would be likely to support a high-speed rail. 

With $3.5 billion of federal funds committed to the project, Reed argues that it can be thought of as "Solyndra times seven"--referring to the Bay Area solar panel manufacture that received $528 in federal loans before filing for bankruptcy. 

Proposal to Cap California Gas Taxes

George Runner, a member of the State Board of Equalization is seeking to persuade lawmakers to support a limit on gas taxes in the event gas prices continue to exceed $4.00 per gallon.  In particular, he is proposing to limit application of California sales tax to the first $4.00 per gallon.    

Currently, California gasoline taxes and fees average 67 cents per gallon, one of the highest in the nation.  Included in California gas taxes and fees are the following:

• Federal excise tax of 18.4 cents per gallon
• CA excise tax of 35.7 cents per gallon
• CA sales tax of 2.25% (plus local taxes) 

However, California sales tax on gasoline is unique as it is calculated on the total price of the fuel sale including excise taxes--leaving Californians to literally pay a tax on a tax.  Runner's proposal seeks to provide California taxpayers with some relief as gas prices increase.  

California's Reliance on the One Percent

Currently, California relies disproportionately on high-income earners.  As can be expected, states that rely the most on the wealthy now have the largest budget gaps to fill as the downturn in the economy has left these state governments scrambling for cash.  As the map below indicates, California is not alone in its reliance on the top 1% of earners. 

The danger of relying on the top earners is that  the wealthy have wildly fluctuating incomes, which means that California state revenues will also fluctuate.  If funds are not set aside in a rainy day fund  during economic booms (which they haven't been) then during an economic downturn, tax revenues dry up.  One of the major concerns of Governor Brown's newest tax proposal is that it relies, to an even greater extent, on the wealthy--adding 3% to California's top tax bracket.  

Employee Could Not Deduct Forgiven Interest on Employer's Loan

In a recent Tax Court case a taxpayer employee was denied interest deductions on a loan from his employer after the employer forgave the loan.

The taxpayer was recruited as a stock broker and as part of his compensation, the employer lent him $500,000, upfront, which was to be paid back by the taxpayer (including interest) at the end of each year over five years.  However, the note provided that the employer could forgive that year's installment payment if the taxpayer continued working for the employer.  (This arrangement is fairly common and allows the employer to give an employee a large signing bonus, while spreading tax payments over several years). 

The taxpayer worked for all five years and so all principal and accrued interest was forgiven and such forgiven amounts were properly included in the employee's income.

However, the taxpayer argued that he should be allowed to deduct the forgiven interest from income because under Section 108(e)(2),  the payment of such interest would have been otherwise deductible under Section 212 as being incurred for the production of income (namely, his work as a stock broker). 

Unfortunately for the taxpayer, the Tax Court held that he did not produce enough evidence to show that he used the $500,000 loan proceeds to buy stock or securities, but simply produced a list of transactions he had entered into.  As such, there was no ability to trace the use of the loan proceeds to those financial transactions. 

It is imperative that anytime an employer and an employee enter into a loan arrangement that both parties keep accurate records and seek advice from competent tax advisers to ensure that the loan is structured properly. 

(Brooks v. Commisioner, T.C. Memo. 2012-25)

California's Greek Tragedy

I was reading a recent article in the Wall Street Journal entitled "California's Greek Tragedy" and ran across this shocking statistic:

From the mid-1980s to 2005, California's population grew by 10 million, while Medicaid recipients soared by seven million; tax filers paying income taxes rose by just 150,000; and the prison population swelled by 115,000.

I first thought that this might have been a typo.  After all, how is it possible that California could add 10 million people, yet only have an increase in taxpayers of just 150,000?  To date, no retraction or correction has been made to the article.  This statistic is another stark reminder of California's fiscal woes.