the dollar vigilante blog

The “Flee California Now” Proposition

[Editor’s Note: The following post is by TDV contributor, Wendy McElroy]

On November 6th, California declared war on prosperity. Any productive person who can leave California should, and they should do so immediately. It is already so difficult to escape state taxes that even working and living abroad is not an automatic exemption. Now, with a Democratic supermajority in the state legislature, tax hikes and policy can be rubber stamped. Imagine how difficult escape may be in a few years.

Meanwhile, other bankrupt states are watching the precedent set by California. The stretch of avaricious governments across the length of America should convince prudent people to jump across a national border and not just a state one.

CALIFORNIA'S DECLARATION OF WAR

Proposition 30 created a four-tiered tax rate to punish the productive. For incomes between $250,000 to $300,000, the rate is now 10.3% on anything over $250,000; between $300,000 to $500,00, the rate is 11.3%; between $500,000 to $1,000,000, it is 12.3%,; and, for anything over $1,000,000 the rate soars to 13.3%. As Forbes stated, “That eclipses New Yorkers’ combined state and local top rate of 12.7% and Hawaii’s top rate of 11%.” The rates are in effect for 7 years and apply retroactively to all income earned since January 1st.

The money grab is supposed to finance public schools and community colleges. But nothing stops politicians from draining existing “school money” and replacing it with Prop 30 funds. Where would the drained dollars go? An editorial in the Wall Street Journal commented sharply, “California Governor Jerry Brown is trying to sell his tax hike to voters...by saying it will go to schools. The dirty little secret is that the new revenue is needed to backfill the insolvent teacher's pension fund.” An April actuarial report showed that teachers' pension contributions would have “to increase by about 68% to pay down its $65 billion unfunded liability over the next 30 years.” But the increase would make Big Labor turn against the Democrats. And, so, the private sector is looted again to feed the beast of public sector unions. Or more accurately, California's private sector per se wasn't looted; it was California's wealthy. At the same time Prop 30 was passed, Prop 38 was defeated. Prop 38 would have increased the state tax rate for most Californians and not just the bitterly resented rich.

CALIFORNIA REACHES ACROSS BORDERS

The message to all wealthy Californians is clear: run fast, run far. But they need to be smart about how to flee because California will use any pretext to keep reaching into their wallets. As in other high-tax states, the California taxman considers a person to be a resident until he is proven innocent.

The Franchise Tax Board (FTB) Publication 1031 states, “Guidelines for determining Resident Status” (2011), spells out some of California's gotchas. A resident is defined as an individual who is present “for other than a temporary or transitory purpose.” Simply stated, a person becomes a resident after 9 months in California. Being a resident means being liable for taxes on the full amount of income earned.

But what if a resident has a one-year contract to work and live in Saudi Arabia? Just like the federal government, California has a “worldwide tax system.” This means a resident is taxed on income earned anywhere in the world.

Taxes can be avoided only by claiming non-residency or a “Safe Harbor” status, which requires absence from California for 546 consecutive days. The two exceptions to the 546-day Safe Harbor rule are revealing:

  • The individual has intangible income exceeding $200,000 during a year in which the contract is in effect.
  • The principal purpose of the absence is to avoid personal income tax.

In short, people remain residents as long as California thinks there is money to be grabbed or it needs to quash the dangerous precedent of tax evasion.

Even leaving California for an extended period does not necessarily bestow non-residency. FTB Publication 1031 further defines a resident as someone who is “domiciled in California, but outside California for a temporary or transitory purpose.” The word “domicile” is key. 1031 states, “While many states consider domicile and residence to be the same, California makes a distinction and views them as two separate concepts....Domicile is defined for tax purposes as the place where you voluntarily establish yourself and family, not merely for a special or limited purpose, but with a present intention of making it your true, fixed, permanent home and principal establishment.”

Under this definition, residency depends upon a taxman's assessment of whether California is the principal domicile – the domicile in which a person is most invested. If California is the home to which he intends to return, then being elsewhere is “transitory” even the stay is for an extended period. The assessment of where a person is domiciled is based on individual circumstances. The circumstances include: the location of a spouse, children, or bank accounts; the maintenance of a residence; the retention of professional or other licenses issued by California; the location of healthcare providers and agents such as attorneys; and, the origin of financial transactions. Less obvious circumstances can also help to establish “domicile” and, so, residency. For example, were exemptions claimed on property taxes? Was a non-resident fee paid for a child's college tuition?

FLEE NOW, FLEE SMART

In the wake of Prop 30, businesses and the wealthy will pour out of California...as well they should. But they should flee in a smart way that gives the state no enforceable jurisdiction over them.

In reaction to the flight of money, California will tighten its grip by claiming more jurisdiction over those who leave. For years California has aggressively pursued financial émigrés. In 2006, for example, the Wall Street Journal described a California software entrepreneur named David Duffield who moved to Nevada. WSJ reported, “He spent $50 million on a lakeshore estate and started a Nevada property-development business. What's more, by taking a big chunk of his wealth to Nevada, Mr. Duffield expected to save millions on taxes.” California cried “tax evasion” and presented Duffield with a $19 million tax bill. Renouncing California residency is apparently as difficult as renouncing U.S. citizenship.

And tax-collectors are apt to become ever more diligent as the state's economy implodes.

CONCLUSION

Tax policies vary from state to state, and some forms of theft are less onerous than others. The surest protection from any state, however, is to make your assets portable and to carry them across a national border into a friendly country. Especially if Obama acts on his “soak the rich” rhetoric, foreign travel --and permanent escape -- may become necessary.

Meanwhile, an iron curtain is gradually wrapping itself around America. That is the way of totalitarian regimes. They rob people blind and, then, close down the “exits” so no one can escape the robbery. Or, rather, those who escape are those who looked around and noticed the door was closing. 

Wendy McElroy is a renowned individualist anarchist and individualist feminist. She was a co-founder along with Carl Watner and George H. Smith of The Voluntaryist in 1982, and is the author/editor of twelve books, the latest of which is "The Art of Being Free". Follow her work at http://www.wendymcelroy.com.

Damned shame about California. Why, oh why is it that the most totalitarian communist real estate on the North American continent (and that's on a continent that includes Canada) is also the place that attracts all the hottest women?

This isn't idle speculation either. Your editor has done a comparative study using personal travel experience and multiple dating sites. The distribution women with model/actress quality looks is striking. In terms of beautiful women, California really does suffer an embarrassment of riches. Really ashame that the spirit of the place is so thoroughly commie. Sacramento...the Kremlin of the American West!

Could California be the canary in the "get out of Dodge" coal mine? California is giving us the prelude to the scenario that will undoubtedly play out on a nationwide scale. DC will be taking a page or two from Sacramento's script. So it's best to start lining your internationalization ducks up now, before it's too late. 

Regards,


Gary Gibson
Editor, The Dollar Vigilante



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