Dan Morain: Rush is on to avoid Uncle Sam's tax bill

dmorain@sacbee.comDecember 12, 2012 

By Dec. 21, Larry Ellison will have more than made up for that $3 million he misspent in October trying to elect Mitt Romney as president.

On that day, the billionaire founder of Oracle stands to receive roughly $198 million in accelerated Oracle stock dividends, avoiding $60 million or more in what every financial expert assumes will be higher federal taxes starting in 2013.

Bloomberg news service has counted 150 publicly traded corporations whose boards of directors have sped up dividend payments by $20 billion, a step that allows investors to pay taxes under current low rates, rather than what almost certainly will be higher rates in 2013.

What will be Uncle Sam's loss could turn into California's gain, at least in the short term. Assume the $20 billion is correct. Assume, too, that because of California's size, state residents receive 12 percent of that $20 billion.

Based on higher state income tax rates brought about by the passage of Proposition 30, the state could receive about $250 million. Sacramento could collect more if, as seems likely, rich people take capital gains, and receive bigger bonuses before the year is over to avoid higher federal taxes next year.

There is precedent. In 1986, the Reagan administration and Congress raised the capital gains tax rate to 28 percent, nearly twice the current 15 percent rate. Californians reacted by taking gains in 1986. That eased their federal tax bite, but they paid more in California taxes.

In 1987, Sacramento became "awash in cash," as politicians said at the time. Then-Gov. George Deukmejian pushed legislators to rebate $1.1 billion to taxpayers. Later that year, the stock market crashed and a $1 billion-plus budget gap opened in 1988.

Former state Sen. Jim Brulte negotiated several budgets during his tenure in the Legislature, and recalls the heady days of the dot-com boom when investors made huge sums in the stock market, and the state collected its share.

Until, that is, the bust came, and Gov. Gray Davis' budget gushed red ink. Brulte worries that, flush from revenue from the end of this year, legislators with no sense of history will party as if it were 1999, or 1987.

"Taking one-time windfalls, and spending it on permanent, ongoing programs is in part the reason we got into trouble in the last decade," said Brulte, running to become the new state chairman of the Republican Party.

President Barack Obama and Republican Speaker John Boehner are negotiating to avoid what Beltway people call the "fiscal cliff." A result almost surely will be higher federal tax rates. Obama has proposed a capital gains rate of 23.8 percent, and a dividends rate of 43 percent, up from 15 percent.

Tax avoidance is an all-American pursuit, as evidenced by the companies that accelerated 2012 dividend payments such as the Walt Disney Co., Wal-Mart, Costco and Las Vegas Sands, the casino company controlled by Sheldon Adelson.

Dwarfing the $3 million that Ellison spent on Romney's campaign, Adelson contributed $54 million in his failed attempt to elect Republicans including Romney, who had promised more tax cuts.

Although their man didn't win, Adelson and Ellison stand to receive a nice consolation, though Adelson's will be sweeter. He is expected to receive a $1 billion-plus dividend payment. Since Nevada doesn't have a state income tax, Adelson won't be cutting his state in on the action.

Ellison and other wealthy Californians, by contrast, will pay a hefty 13.3 percent in California income taxes on earnings in excess of $1 million. That's up from the old 10.3 percent, thanks to the passage of Proposition 30, Gov. Jerry Brown's initiative that raises income and sales taxes.

Ellison, who stayed out of the Proposition 30 campaign, probably can afford it. A Woodside resident who has been buying beachfront property in Malibu, Ellison has a fortune estimated at $41 billion.

Still, because of the new rate, he could pay upward of $26 million to Sacramento on his $198 million dividends, about $6 million more than if the old rate been in effect. Multiply that by payments from other wealthy California shareholders in such firms as Wal-Mart, Disney, and Costco, and you're starting to talk real money.

Department of Finance experts figured California would get another $300 million in revenue based on the probability that rich people would react in 2012 to the likelihood that federal tax rates would increase in 2013.

But budget experts offer a cautionary note: Whatever gains come from accelerated payments in 2012 would be deducted from receipts from 2013-14. A boost in one year would be balanced out in the following year.

How much that bump might be won't be known until people pay 2012 income taxes in 2013. But if rich Californians who avoid federal taxes end up paying significantly more in state taxes, voices of fiscal restraint should start worrying.

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