The Laugher Curve on the Coast Jude Wanniski August 18, 2003

Memo To: Website Fans, Browsers, Clients
From: Jude Wanniski
Re: Taxes in California

I’d known state taxes in California were very high, but I did not know that Gov. Gray Davis has been trying to raise them to even higher levels in order to deal with the budget deficit. I’m sure the New York Times and the major media have somewhere given you these numbers, but they must have hidden them away for me to miss them. I was brought up to date by Wayne Jett, our West Coast marketing director in Los Angeles, that “California taxes all income, including capital gains, as ordinary income. Presently the top rate is 9.3%, and Davis' proposal has been to increase the top rate to 11.3%. State sales tax is 8.25%. Property taxes are limited to 1% of market value, which means the last sale price plus no more than 2% annual adjustment. So California taxes earned income, dividends and capital gains on stocks and home sales all the same.”

Wayne also believes that unless there is a change in Sacramento, California will not conform to the new federal approach to dividends, so the increased payment of dividends by companies to California shareholders will simply increase the state's tax bite. Pretty ugly. It is no wonder that Davis is immensely unpopular and the voters want to get rid of him asap. His approach and that of the Democratic legislature would only compound capital flight, driving the state further into the upper reaches of the Laffer Curve. Anyone with significant taxable income would be crazy to stick around. It becomes ever more clear why state revenues have been in a free fall, as the biggest taxpayers are moving east. Nevada, for example, has no taxes on income or capital gains.

Steve Shipman, a client of Polyconomics for almost 20 years, was properly horrified when he learned that Arnold Schwarzenegger had decided to consult Warren Buffett, “the Sage of Omaha, er, the Emperor of Emerald Bay, as an economic adviser.” Right out of the starting gate, Buffett proposed that a Governor Schwarzenegger repeal Proposition 13, which would then allow property to be taxed at the confiscatory levels last seen before Prop. 13 passed in 1978. Here are comments Steve sent over the weekend:

This is clear: Any advice given by Buffett will harm the state and its entrepreneurs. Schwartzenegger appears, now, a much different political agent than the days of the 'eighties when I saw him at all of the major fundraisers for Jack Kemp. I guess that he's bought into the secrets of success of the Kennedy money: When you cannot produce money, buy political protection to preserve what you have.

In any event, my counterproposals to Buffett follow:

1) Special tax assessments on See's Candy. A 50 cent tax per piece on the really good stuff: the BORDEAUX, the Scotch Mallows, the Butter chews, any of the new fangled truffles; a 25 cent tax per piece on the good stuff: the chocolate creams, the good milk chocolate varieties, the peanut brittle, and Ms. See's Fudge; a 10 cent tax on the remaining items, except those really weird nougat-y things that nobody eats anyway. This should be good for some $100 million per annum, which we can annuitize for a special See's Bonds that should allow at least a $1.5 billion issuance;

2) Special tax assessment on Coke, Cherry Coke, and all related corporate products: 50 cents per can. Hey, it'll help reduce obesity as well! This should be good for at least $200 million per annum, which, when annuitized as a Cola Bond should allow for a $3.0 billion issuance;

3) Special tax assessment on car insurance policies: $1,000 per car per annum. This is a slam dunk. Californians HAVE to drive and Berkshire Hathaway is well positioned by its ownership of GEICO and Twenty-first Century insurance companies to become a wonderful tax collector for the state. Assuming these two companies have a 20% market share of 50 million cars, this could raise an amazing $10 billion per year! We could wipe out the deficit in two years with this tax and use the above referenced bond issues to finance Arnold's after school programs;

4) Special tax assessment on re-insurance policies issued in California: Again, a $1,000 assessment per policy per annum; $3,000 assessment for 'specialty' policies conceived of and written in Omaha by really smart mathematicians from India;

5) Special tax assessment on shoes: $3 per pair, except for Dexters, which will be assessed $30 per pair because Warren wants to help out the state;

6) Special tax assessment on privately chartered jets: Wow! What a treasure trove with a state populated with the likes of Spielberg, Hanks, Cruise and the like, not to mention all of the investment bankers and vc guys in the Bay Area. $1,000 per seat per flight. Assuming your 'average' G4 has eight seats, that's $8,000 per flight. At 100 flights per day, this amounts to $292 million per annum. Annuitize this as a Flight Bond and the state has created another $4.38 in bonds to re-finance itself.

And this is just a beginning. We haven't explored special wealth taxes assessed against Berkshire Hathaway, its shareholders, or the Emperor himself, let alone Arnold, his prized cigar industry, or the funky real estate that he owns in Venice.

Please feel free to pass this along to the muckity mucks in the campaign, in Omaha, er, I mean, Laguna Beach.

Very truly yours,

Stephen W. Shipman
Taxpayer: Property taxes; Utility taxes; Sales taxes; Gasoline Taxes; Income taxes; Special District taxes galore