Biden’s Tax Plan: Where It Hurts Californians the Most
Right by the Bay has been following Sacramento’s tax raising schemes here, here, and here. But the state’s tax marauding politicians aren’t the only ones we should be worried about. Presidential candidate Joe Biden also wants Washington’s share of our wallet. Below are three proposed tax hikes that would be especially crushing for California residents and businesses.
Raise Long-Term Capital Gains on Incomes above $1 million
While this sounds like another tax-the-rich scheme targeting wealthy Californians, it’s far more insidious than that. Currently, long-term capital gains are taxed at 20 percent for those earning more than $441,451 for individuals and $496,601 for married couples. Biden wants to tax long-term capital gains at ordinary income tax rates of 39.6 percent on incomes above $1 million. Under this scenario, a smart young techie or entrepreneur would think twice about working 100-hour weeks for little pay and no job security: “Why join a risky start-up when half of the payout will be taxed away in the end?” said a former start-up employee and UC Berkeley graduate.
Raising the capital gains tax from 20 percent to the same rate as ordinary income tax shows Biden’s lack of understanding of the relationship between risk and reward, which should be no surprise after four decades in government. Investing in a venture or in the stock market is not the same as earning a consistent salary due to one simple fact: in investing, you could lose your money. Investors, entrepreneurs, and start-up employees have to be rewarded for taking more risks, if not, a 9 to 5 job becomes a lot more appealing. Over time, taxing capital gains at the same rate as income will turn California from a state of entrepreneurship and innovation to one where most workers are watching the clock.
Increase the Top Marginal Tax Rate
Biden also wants to raise the top marginal income-tax bracket from 37 percent to 39.6 percent. This year, the top marginal rate applies to earned income above $518,400 for single filers and over $622,050 for married couples. For most states, this tax rate will apply to only its millionaires, not so in California. In San Francisco, salary.com has the average physician’s salary at $348,000. Indeed.com, a site popular among tech workers, has the average salary plus bonus of a senior software engineer at $190,000. And these are averages – half of these professionals make more.
If this sounds impressive, it really isn’t. Employers have to pay these professionals more in order to attract them to the state thanks to California’s exorbitant cost of living. In San Francisco for example, the cost of living is 80 percent higher than the national average — groceries are 29 percent higher and housing is a whopping 231 percent higher. In California, people who are in the upper brackets are not the fabulously wealthy, but upper middle-class families. A family of two income-earning professionals could easily put that family in the highest brackets. Under the Biden tax plan, expect to see these families continue to flee to states with more reasonable costs of living such as Texas and Florida.
Elimination of Stepped-up Basis for Heirs
For generations in this country, the assets that pass directly to your heirs get a step-up in basis – to market value – for income tax purposes. As president, Biden wants to tax an asset’s unrealized appreciation when it is transferred. “The idea that you could build up your small business and escape death tax and income tax to pass it to your kids is on the chopping block,” writes Robert Woods in Forbes. “Biden would levy a tax on unrealized appreciation of assets passed on at death. By taxing the unrealized gain at death, heirs would get hit at the transfer, regardless of whether they sell the asset” writes the tax attorney. California’s mom and pop businesses are already suffering from the pandemic lockdown, if they can’t build generational wealth for their children and grandchildren, they might just throw in the towel.
Californians and businesses are already leaving the state. But under Biden’s tax proposal, it will be a lot harder to escape.
Rowena Itchon is senior vice president of the Pacific Research Institute.