Wealthy Face Crushing Taxes in California

Residents of California face heavy income tax burdens.  The federal tax rate on income over $400,000 ($450,000 for joint filers) rose from 35 percent to 39.6 percent for the 2013 tax year and beyond.  The Affordable Care Act imposes a 0.9 percent Medicare tax on incomes over $200,000 ($250,000 for joint filers), which is on top of the pre-existing 1.45 percent employee portion of the Medicare tax.

In addition, the California income tax rate on incomes over $500,000 ($1 million for joint filers) rose from 9.3 percent to 12.3 percent on January 1, 2013 as a result of Proposition 30, approved by voters in November 2012.  Furthermore, pursuant to Section 17043 of the California Revenue and Taxation Code, taxpayers with income over $1 million pay a 1 percent “surcharge” on the portion of their income that exceeds $1 million.  This surcharge- designed to fund mental health services- brings the highest marginal state income tax rate in California to a whopping 13.3 percent.

Even assuming that a wealthy California resident deducts state income taxes on his or her federal tax return, the above numbers amount to an approximate marginal tax rate of 50 percent on high-earners.  And this number rises by another 1 percent or so due to the phase-out of certain deductions for wealthy taxpayers.  In summary, a high-income California resident faces a marginal federal tax rate of approximately 51 percent,

For wealthy taxpayers with capital gains, the federal income tax rate on such gains rose from 15 percent to 20 percent for the 2013 tax year, and these gains are also subject to a 3.8 percent Medicare tax on net investment income.  Moreover, California does not afford preferential tax treatment to capital gains, so a wealthy taxpayer with such gains also faces the 13.3 percent state income tax.

Finally, these calculations do not take into account Social Security taxes (which are capped under current law), property taxes, sales taxes, estate taxes, and other taxes.