Friday, February 13, 2009

$1 from Washington, $3 to Sacramento

Update 2/17: The Sacramento Bee has posted an on-line tax increase estimator. Check it out. Looks like my rough calculations were fairly accurate for my family.

The structure of this tax increase is pointed towards middle and lower income taxpayers compared to the current system (which is very progressive). The income tax increase is relatively small and dominated by shrinking the child tax credit. Perhaps California's tax system is too progressive now and it should shift in this way, but that is a political/equity debate for another time. It is true that this tax increase will be more of an anti-stimulus, because the tax increase is pointed more at the lower/middle income people who are more likely to adjust their short-run spending in response.

Original post from 2/13:
Some rough, preliminary estimates of how the legislation pending in Washington and Sacramento will impact my family's tax bill if approved. My wife and I are fortunate to both have good jobs, health benefits, etc. Our income is in the mid-$100s and we have 2 dependent children.

The Federal stimulus package will provide $800 to married couples, but this will start phasing out at $150,000 income. I haven't done our 2008 taxes yet, but I think we will be in the partial phase out range, so we will probably get around $500 from Obama's tax cut.

The proposed compromise that the legislature will vote on tomorrow will hit our state tax bill in many ways if approved. My initial guess is that we will be paying around $1500 more per year in state taxes. These include:
1. about $600 more in income taxes ($420 from the $210 reduction in the dependent tax credit and around $180 from the 2.5% surcharge).
2. about $600 more in sales taxes (not sure of our annual taxable sales, but this looks to be about $400 for the average household in the state, and I am pretty sure our spending is above average)
3. about $300 more in gas taxes and vehicle license fees.

I have no doubt there are some errors above, but I think it is a reasonable estimate for us and people in a similar position. On net, we will probably be paying another $1000 in taxes per year. One of the more interesting aspects is that for the majority of taxpayers with dependent children, the loss of the tax credit is going to have a much bigger impact than the income tax surcharge.

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