A Marginal Income Tax Rate of 288 Percent?

Michael E. Newton, author of book and blog “The Path to Tyranny,” (what an excellent name) has reported on a disturbing court ruling in New York that could open the door to taxation of people’s income who don’t live or work in the state.

I want to focus on this line:

Under the ruling, if an owner doesn’t spend a single a day in a home it could still count toward a permanent residence.

If every state applied this ruling and federal court does not overturn it, a person could in theory own housing property in every single state and thus owe income tax in every single state and the District of Columbia. By my rough calculation using the top marginal federal income tax rate of 35% and the sum of all the top marginal state income tax rates, a person could theoretically be taxed at a rate of 288%. (Yes, I recognize it is absurd for somebody to have property in all 50 states and DC, but the whole notion of paying income taxes in every state you own property is equally absurd.)


Yet, this is the logical extension of the mentality behind the so-called “Jock Tax” where players are taxed based on the number of games played within a state.  Even if the player doesn’t play, i.e., work, they still have to pay the Jock Tax.  So if simple presence is enough to trigger tax nexus (who taxes what)–any business trip could trigger nexus even if you’re just a prop.  In fact, New Jersey has already extended the Jock Tax to out-of-state lawyers.  Taken a few steps further, they are now saying that a house is like having presence in the state full-time.

Also I wonder what New York is going to do about all the tax treaties it has signed with other states governing tax nexus?  What will happen is what happened with the Jock Tax . . . California first imposed it and then Illinois imposed theirs in retaliation and then other states jumped in the fray.  I think most states, and some cities, with a professional team in the big four (NFL, NBA, NHL and MLB) now have a Jock Tax.  Retaliation is what could make Michael’s doomsday scenario a reality.

The Feds should have put a stop to the Jock tax along time ago . . . now one bad tax idea is snow-balling into another bad tax idea.

The Coming Food Tax

Excise taxes violate the most basic principle of taxation–low rate, broad base–since they are purposefully levied on a narrow base and generally with the highest rate possible.  Why?  Generally to “discourage” the activity being taxed.

Take cigarettes for example.  The base is defined as one product and the tax rate, especially over the last decade or so, keeps going up, up and up i the name of “reducing smoking.”  Unfortunately, violating the principles of taxation carry a heavy price.  In the case of cigarettes it can lead to cigarette smuggling and cross-border shopping.

Now, apparently, they want to tax your food . . . I wonder what kind of unintended consequences will come of this?

Hat Tip to International Liberty

2009 HGTV Dream Home Winners Sell House . . . Thanks to Taxes

Following on my previous blog which estimated the tax costs of winning the 2010 HGTV Dream Home in Stowe, Vermont, this news story confirms the difficulty of hanging on to the HGTV house due to . . . TAXES!

A Florida couple who won the 2009 HGTV Dream Home has sold the property back to developer Steve Ledson after deciding it was too expensive to maintain and too far from their grandkids . . . Cheryl Smith said their taxes on the winnings would have been up to $500,000. Property taxes and assessment would have been an additional $25,000 a year. Smith said her husband, a retired engineer for Ford Motor Co., would have had to go back to work to support their Dream Home.

Other winners have tried to hang onto their homes as well, but with little success:

Of the 13 Dream Homes HGTV has given away, only two winners managed to keep their homes for any length of time. A Thousand Oaks family held on to their home for eight years before selling, but another couple had to auction off their Dream Home in Texas last year after running through their savings and taking out a loan to pay the taxes. [emphasis added]

In the end, the old saying still applies–“The Tax Man Cometh and The Tax Man Taketh Away.”

Rhode Island’s Income Flees to Florida

As a follow-up to my previous blog on Rhode Island’s Taxpayer Fleeing the State, the chart below shows the gross in- and out-migration of income from Rhode Island to Florida.  Naturally, there are critics of the study, but no one has yet to address this smoking gun.  If the estate tax has nothing to do with the out-migration of income to Florida, then what explains the sudden surge in 2004?  Did the weather suddenly get better in Florida or worse in Rhode Island?

Rhode Island Income Flees to Florida

Taxes Matter VII: Rhode Island Taxpayers Flee State

Yesterday the Ocean State Policy Research Institute released my study on the migration of people and income out of Rhode Island: “Leaving Rhode Island: Policy Lessons from Rhode Island’s Exodus of People and Money.” (pdf) Here is the excellent cover art followed by the Press Release.

Cover Art for Leaving Rhode Island Migration Study

The Ocean State Policy Research Institute (OSPRI) released today its “Leaving Rhode Island” study, documenting the people and wealth that are leaving the state due to out-migration.

A Press Conference will be held today (January 20), at 2:00 pm at the RI State House Rotunda, to discuss the study. Speakers will include Alan Hassenfeld; Bill Felkner, J. Scott Moody (Fellow on Economic Policy), and Mike Stenhouse.

The study, which is based on actual figures from IRS and US Census data, and which can be downloaded from the OSPRI website at www.OceanStatePolicy.org/leavingri.html, paints a grim picture of how Rhode Island’s oppressive tax structure is driving both human and capital resources out of the state. Among the specific findings:

  • Rhodes Island lost a net of 107,086 residents to other states between 1991 and 2009, or about one in ten current residents.
  • Between 1995 and 2007, total net income (in-migration minus out-migration) leaving the state averaged $78,468,000 every year translating into a total loss of over $1 billion.
  • If the annual income loss is compounded over the thirteen years examined in this study, the state has cumulatively lost $4.6 billion.
  • Had this income stayed in Rhode Island, an additional $540 million would have been collected in state and local taxes.
  • Of the seven variables examined, the Estate Tax is the most influential to where people and wealth migrate.

“Virtually all of my wealthy friends and fellow philanthropists have moved their residencies out of RI,” said Alan Hassenfeld, whose Hassenfeld Family Initiatives foundation commissioned the OSPRI study. “This loss of income to our state’s economy, to our tax revenue base, and for local charitable-giving is a LOSE-LOSE situation for everyone involved. Unless there is a drastic change in the punitive estate tax here in Rhode Island, anyone in my position would be a fool not to leave.”

“If our Rhode Island economy is to ever reach its full potential, we must stop the hemorrhaging of people and wealth”, said Bill Felkner, OSPRI founder and Director of Policy. “We hope that the General Assembly seriously considers these findings and that they can find a way to reverse this trend.”

According to the OSPRI study, Rhode Islanders are fleeing to states where the average tax burden is 14% lower. The Estate Tax, however, is the primary driver of the out-migration of wealth.

“The estate tax is one of the most counter-productive taxes in our state’s tax code”, continued Felkner. “Small and family businesses are often forced to dissolve and many  prudent high-net-worth individuals will simply leave Rhode Island to avoid the ‘death tax’.”

John M. Harpootian, a principal in the law firm of Paster & Harpootian, Ltd. who limits his practice to estate planning, stated that “It is a common practice to advise Rhode Island residents that a change of domicile can save significant estate tax … . During just the last 5 years, our office has seen nearly 100 of some of the wealthiest Rhode Island residents change their domicile to avoid paying RI estate taxes at their deaths.”

On January 14, OSPRI conducted a briefing for legislators who were interested in learning more about the study’s findings. Attending the briefing, conducted by Scott Moody and Bill Felkner, were Senators Kettle, Maher, Pinga, O’Neil, Ottiano, and Shibley along with Representatives Chippendale and Gordon. Also attending the briefing was Gary Sasse, former Director of Administration and former RIPEC Executive Director, who supported the study’s findings in stating that “RI’s Estate Tax has a negative impact on the State’s ability to maintain wealth and thus enhance investments. We must develop and implement a tax reform strategy to address this if we are going to going to improve our economic competitiveness.”

“OSPRI will continue to provide vital research about the critical issues we face in our state”, said Stenhouse (OSPRI Executive Director). “Out-migration is a serious problem for RI. Without an honest debate about the actual consequences of our public policy, we will continue to chase our tail.”