Tax windfall comes from the top

Why did no one see California’s $4.3 billion tax surplus coming? It might be
because the windfall involved the hard-to-predict actions of a very small
number of people.

The top 1,310 returns of the 2005 tax year represented $3.9 billion in
revenue, according to figures from the Franchise Tax Board (FTB) and the
state controller’s office. But even these returns–which average nearly $3
million each–pale by comparison to those at the very top. According to
multiple sources, the top 50 checks approached almost $1 billion on their

Such huge tax returns typically represent high net worth individuals selling
off businesses or large stock holdings, said Jean Ross, executive director
of the California Budget Project. While California’s forecasters at the FTB
and Legislative Analyst’s Office consistently are rated some of the best in
the country, she said it is very difficult to predict the actions of such a
tiny group of people.

“You can’t forecast that,” Ross said. “What you can forecast is the $300
check I sent.”

The FTB took in $11.3 billion in April, $4.3 billion more than the same
period a year ago, despite projections that revenues were going to stay
relatively flat. According to some sources familiar with the budget process,
revenues eventually could top January projections by as much as $6 billion.
The FTB has not announced any final numbers, said a spokesperson. Many of
the returns represent estimated payments, he added, meaning that figures may
change. But the governor will release his revised budget-revenue estimates
on Friday.

“This tax season is not over, and won’t be until October, because we have a
lot of people filing extensions,” the spokesperson said.

The state’s tax fortunes have long been tied to the fortunes of its large
numbers of very rich residents. In 2000, during the height of the dot-com
boom, 43,779 Californians reported incomes over $1 million. This plummeted
to 24,939 in 2002, then rebounded to about 38,000 in 2004, according to FTB
records. The number of Californians making $5 million or more went through a
similar rollercoaster: 6,455 in 2000, dropping to 2,522 in 2002.

An early rumble of the revenue tsunami was spotted in November, when 14 top
executives of the search engine company Google sold a combined $4.35 billion
in stock. At a top state-tax rate of 9.3 percent, this alone led to $404
million in tax revenues for the state. It also cemented Google founders
Larry Page and Sergey Brin in a tie for the second-richest Californians.

The only Californian who is richer, Oracle founder Larry Ellison, did his
part as well. He sold $195 million in Oracle stock during 2005, according to
company spokeswoman Kimberly Pineda. This resulted in another $18.1 million
in state taxes on these transactions alone. Other Golden State members of
the Forbes list who made large stock sales include Yahoo co-founder David
Filo and several members of the Fisher clan, who started The Gap.

Then, of course, there is the state corporate tax rate of 8.84 percent, with
some of California’s top technology firms paying large amounts. Google, for
instance, reported profits of nearly $1.5 billion on revenues of $6.1
billion last year. Corporate taxes were not included in the $11.3 billion
reported by the FTB.

According to the most recent Forbes magazine list released in September,
nearly one-quarter of the 400 richest Americans live in California. Even the
poorest Californians on the Forbes list are worth $900 million apiece. None
of California’s trio of famously wealthy gubernatorial candidates–Governor
Arnold Schwarzenegger, Controller Steve Westly and Treasurer Phil
Angelides–made the list. However, estimates of Schwarzenegger’s wealth, much
of it tied up in a blind trust, range up to $800 million.

Angelides’ has been criticized for proposing higher taxes for wealthy
Californians. But as reports of high-end returns have trickled out, the
campaign is claiming vindication.

“I think it rests our case pretty effectively,” said Bob Mulholland, a
senior adviser on the campaign. “While middle-class Californians have been
struggling with gas prices and mortgages, those at the top have done very
well under Schwarzenegger and Bush.”

But some in the technology industry say that taxes in California are already
too high–and that raising them even higher will lower revenues. J. Dale
Debber, CEO of Data Control Corporation of Grass Valley, said that his
company will be expanding, but not in California, due to high corporate and
personal-income taxes. They are looking at Arizona, where tax rates are
generally about half as high, he said.

“If California wants to increase taxes on upper income people, all that will
do is drive us away,” Debber said.

While some members of the fairly rich might be leaving, the super-rich
appear to be staying. California has held the top spot on the Forbes 400
list, with at least 90 members, for years. Income-tax-free Nevada boasts
only four members of the Forbes 400.

“Nevada doesn’t have a beach, now does it,” noted a spokesperson for the

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