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Tech Advantage for Now, but California has Second Highest Capital Gains Tax in the World

Richard Rider
Chairman of the San Diego Tax Fighters

The one bright spot in California’s otherwise moribund economy has been the state’s tech start-ups in the electronics and biomedical fields.  Liberal politicians always trot out this niche segment of our economy — claiming that California is just hunky-dory — proven by this lucrative (if high risk) field of endeavor.

And indeed, HISTORICALLY the progressives can make that case of the success of this area — admittedly while grossly overstating the relative importance of this category of business and investment to the state as a whole.  Venture capital has done much investing in California’s tech fields, far in excess of the national average.

But that was then, and this is now.

What has changed?  Four major factors:

1.  Prop 30 raised the CA income tax 29% on the well-to-do — including on capital gains.

2.  The deduction of state income taxes on federal income tax returns largely phases out for the wealthy — with 80% of such deductions lost for over $2 million of income.  The combination of these two factors raises the California income (and capital gains) tax on truly wealthy Californians an astonishing 83.6%.

3.  The CA Franchise Tax Board has arbitrarily repealed the tax exemption of 50% of the profits from the sale of such CA start-ups — and indeed made this effective DOUBLING of the tax retroactive for four years — doubtless building trust among California entrepreneurs.

4.  On the federal level, the capital gains tax has also zoomed upwards in 2013, further penalizing those who take such high-risk, high-reward investments –  while D.C. profits from the inflation it creates.

High taxes have now become a BIG factor for people and companies investing in California.  Surely those with mobile capital will be considering less penalizing alternatives.

UPDATE:  We now have a brand new Tax Foundation study released on capital gains.

BOTTOM LINE:  All told (see factors above), for wealthy folks, California “offers” the 2nd highest capital gains tax in the industrialized world — probably 2nd in the world PERIOD.  Only the Denmark commune charges more.  Needless to say, we trounce all the others states.

Of course, the static (and statist) Progressive assumption is that taxes don’t matter — that California is where venture capital will continue to want to invest, regardless of how much the deck is stacked against these “greedy capitalists.”

But there are alternative high tech centers located in other states, each attracting a pool of readily employable tech talent — not to mention investment options in other countries.  Meanwhile governors are lining up to tout their states versus California.

Given the intense Sacramento hatred of and disdain for the wealthy in California, it seems logical that a growing segment of our young entrepreneurial class (and the money that funds them) will be migrating to better economic climates.  But then, that conclusion is based solely on fundamental economic axioms — only time will tell.

Maybe I’m wrong.  I wish I were, but I suspect that I’m not.

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