Are Tax Hikes The Cure For CA Budget Woes?

One can only wait and see how the Passage of Prop 30 will affect California, but politcal cartoonist Michael Ramirez has his own take.

(Coutesy of National Review)

As Goes San Bernardino, So Goes CA?

There is an absolute must-read article from Reuters that examines San Bernardino's downward spiral in exhaustive detail.

Below are some of the tidbits that were shocking:

Yet on close examination, the city's decades-long journey from prosperous, middle-class community to bankrupt, crime-ridden, foreclosure-blighted basket case is straightforward — and alarmingly similar to the path traveled by many municipalities around America's largest state. San Bernardino succumbed to a vicious circle of self-interests among city workers, local politicians and state pension overseers. 

Little by little, over many years, the salaries and retirement benefits of San Bernardino's city workers — and especially its police and firemen — grew richer and richer, even as the city lost its major employers and gradually got poorer and poorer.

...

In bankrupt San Bernardino, a third of the city's 210,000 people live below the poverty line, making it the poorest city of its size in California. But a police lieutenant can retire in his 50s and take home $230,000 in one-time payouts on his last day, before settling in with a guaranteed $128,000-a-year pension.

 ...

San Bernardino's biggest creditor, by far, is Calpers, the public-employee pension fund. The city says it owes Calpers $143 million; using a different calculation, Calpers says the city would have to pay $320 million if it left the plan immediately.
Second on the city's list of creditors are holders of $46 million worth of pension bonds -- money borrowed in 2005 to pay off Calpers. The total pension-related debts are more than double the $92 million owed to the city's next 18 largest creditors combined.
Complicating matters were obscure budgeting procedures that left residents in the dark. The word "pension" doesn't appear once in the most recent 642-page budget, and retiree costs are buried in detailed departmental line items.

Yet even in bankruptcy, reducing pension costs by cutting benefits is not an option - at least according to Calpers.
The pension agency says the benefits are carved in stone, arguing that from the day a worker is hired, the pension plan in place on that day for that person can never be reduced in value under any circumstances, including municipal bankruptcy.
That argument has never been tested in court: When the Bay Area city of Vallejo went bankrupt in 2008, it declined to challenge the pension payments to Calpers, in part because of the daunting legal costs involved.
But the pension-bond insurers who are now on the hook for defaulted bonds in both Stockton and San Bernardino have signaled their intention to do battle with Calpers in bankruptcy court. San Bernardino, in an unprecedented move, has already stopped making payments to Calpers.

Occupy Wall Street Group Buys Consumer Debt--Then Just Forvgives It: a bailout of the 99%

I first read about the movement called Rolling Jubilee the other day and I must admit that I am fascinated by it.

According to its website, the group buys up consumer debt for pennies on the dollar and then just forgives it.  Puff...the debt is gone.  The movement is an offshoot of the Occupy Wall Street movement and considers this action a bailout of the 99%. 

The group claims to have raised over $240,000 of funds and will purchase nearly $5 million in debt--all of it which it will promptly forgive.

The tax consequences of this transaction, however, are subject to debate.  Generally, a debtor whose debt has been cancelled is supposed to recognize as ordinary income the amount of the debt that was cancelled.  However, Rolling Jubilee argues that this debt forgiveness is purely meant to be a "gift" to the debtor, which would not trigger any income tax.

Below is a video from the group that explains the basics. 

To Avoid 21% Sales Tax Theater Sells $16 Carrots--Gives Away Tickets

In what can be considered the most original method of avoiding (or evading) a draconian 21% sales tax, a Spanish theater has actually resorted to "selling" carrots for $16 a piece, and then giving away a theater ticket for free.

When the Spanish government hiked sales tax on theater tickets this past summer, Quim Marcé thought his theater was doomed. With one in four local residents unemployed, Marcé knew that even a modest hike in ticket prices might leave the 300-seat Bescanó municipal theater empty.
"We said, 'This is the end of our theater, and many others.' But then the next morning, I thought, we've got to do something, so that we don't pay this 21 percent, and we pay something more fair," says Marcé in Spanish.
He looked out his window at farmland that surrounds this village, two hours north of Barcelona, and suddenly had an idea: Instead of selling tickets to his shows, he'd sell carrots.
"We sell one carrot, which costs 13 euros [$16] -– very expensive for a carrot. But then we give away admission to our shows for free," he explains in Spanish. "So we end up paying 4 percent tax on the carrot, rather than 21 percent, which is the government's new tax rate for theater tickets."
Classified as a staple, carrots are taxed at a much lower rate and were spared new tax hikes that went into effect here on September 1.

What the Passage of Prop 30 Means for You

Proposition 30 was passed on Tuesday carrying about 54% of the vote.  Here's what it means.

There will be an across the board sales tax increase from a base rate of 7.25% to 7.5% for the next four years.  This will have an impact on all consumers.

In addition, there was a significant increase in marginal rates for those making more than $250,000, which will be retroactive to the beginning of 2012 and last for seven years. 

Under Prop 30 the new brackets for single filers will look as follows:

             In excess of $250,000----10.3% (up from 9.3%)
             In excess of $300,000----11.3% (up from 9.3%)
             In excess of $500,000----12.3% (up from 9.3%)

Proposition 30 will keep California in first place for having the highest state sales tax in the nation and should move California from second (behind Hawaii) to first place in state income tax. 

The biggest question I have, however, is will this seven year "temporary" tax increase be enough or will Governor Brown and his new super-majority legislature push for additional tax increases. Also, is Proposition 13 also soon to be on the chopping block?  Time will only tell. 

Sacramento Man Hit With 17 Year-Old Tax Bill

Bill Elkins, a 66-year-old man from Sacramento was recently hit with a $6,166.39 tax bill from the Franchise Tax Board involving a tax debt from 1995.  The state says he never paid it.  Mr. Elkins claims he did.

Unfortunately for Mr. Elkins, his bank records don't go back that far to prove he ever made that payment and the CPA who prepared the return has passed away.  While the IRS can collect on 10 year-old assessments, the Franchise Tax Board can collect on 20 year-old assessments.  Local news video below.