State’s taxes putting us all on the ropes

Los Angeles Daily News, January 5, 2010

MANNY Pacquiao is the premier boxer in the world, and his upcoming match with Floyd Merriweather could be the richest in history. Promoters are pushing for Staples Center in Los Angeles, but Pacquiao does not want to hold the bout in California. The reason will be of interest to all Californians, not just boxing fans.

The problem is California’s state income tax, one of the highest in the nation, with a top rate of 10.55 percent. If he fights in the Golden State, Pacquiao will face a tax bill of $3.5 million to $5 million – a lot of money even for a world champion. He is subject to the tax even though he is not a California resident.

California shakes down all professional athletes for their “duty days” when they play here, in effect treating them as residents. A three-day trip by the New York Knicks brings in the neighborhood of $163,000 and according to news reports the state brings in $100 million a year from this practice.

Trouble is, other states retaliate so California’s money grab is really a kind of zero-sum game. The high taxes make contracts with California teams worth less money, and state tax laws are now a factor in contract negotiations. Athletes are the easiest for the state to identify, but the tax also applies to all out-of-state workers, including a home-care nurse from Nevada and a blues singer from Chicago.

California also grabs money from financial accounts dormant for only three years – down from 15 years in the late 1950s. In many cases, state officials make no effort to locate the rightful owners of the funds, who last year included more than 20 state legislators. As one case shows, state greed knows no bounds.

California’s Franchise Tax Board sought $7.4 million – up to more than $50 million with interest and penalties – from Gilbert P. Hyatt, who studied at UC Berkeley and invented a microprocessor in the late 1980s. He claims he moved to Nevada, which has no state income tax, before the invention began paying off in the multi-millions. California claimed he was a resident and hounded Hyatt for 15 years.

Last January a Nevada jury awarded $388 million, including punitive damages, to the inventor, finding California’s FTB liable for fraud, intentional infliction of emotional distress, abuse of process, breach of a confidential relationship and invasion of privacy. They state had already spent some $9 million on its vendetta against Hyatt, who holds 70 patents.

So desperate is the state for revenue that during the 1990s California considered taxing editorial cartoons as though they were works of art purchased in a gallery. The “laugh tax” made the state a national joke, but the tax issue is no laughing matter. Neither is the exodus of California’s productive entrepreneurs.

A bipartisan commission backed by the governor recommended reforms, including the reduction of the income tax (highest rate now 10.55 percent) to 2.75 percent for couples earning up to $56,000 and 6.5 percent above that. The state sales tax and corporate income tax would be replaced with a “net receipts tax” on business. Legislators promised a vote on the recommendations then failed to hold one.

Just in time for the holiday season, legislators hiked already high withholding from the paychecks of every California worker by another 10 percent. Then they rubbed workers’ faces in it by claiming this was not a tax increase. Would you pay $5 million to hold a boxing match in a state like that?

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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