California Logic

In California it might soon be illegal for waiters and waitresses to place a straw on your table without being asked first (AB 1884). It may also soon be a requirement to have a backup battery system for your home garage door opener and failure to have one will result in a $1,000 fine (SB 969). So, in this bastion of rationality we call The Golden State it should come as no surprise when the legislature decides to create an unnecessary retirement plan for all residents.

Never mind the fact that a federal version already exists and is in place and was designed to provide a safety net for those not covered by any other form of retirement savings(aka Social Security). And overlook the Federal tax incentives set up to encourage those not covered by employer plans to set funds aside themselves in the form of deductible IRA contributions, Roth accounts, and the Federal Savings credit. Also, the ability to purchase annuities on the open market is available to anyone so inclined.

Let’s further pretend that the state would be a good shepherd of your retirement monies and that the California Public Retirement system covering state employees and California State Teacher’s retirement system covering teachers aren’t severely underfunded.

Nope, what we need is another state run retirement system, this one for all residents.

The California Secure Choice program would be voluntary (but private sector workers would be automatically enrolled) and ostensibly will serve to provide retirement plans for those underserved by all the other options available. There are two big issues with this:

First, the costs to taxpayers is huge. The program has requested a “loan” from the state of $170 Million for startup staff, consultants, and overhead. Ask yourself this: If this loan were to actually be repaid, where would it come from? Answer: fees assessed the savers.

Second, it’s illegal. According to experts, the Secure Choice plan appears to violate the Federal law known as ERISA. President Obama issued a regulatory interpretation that some argue allows for an exception for the California plan, however President Trump rescinded that regulation. So at this point in time the program appears to violate Federal law, and for Congress to change ERISA to allow such plans is highly unlikely.

So, what we are going to get, “good and hard” as H. L. Mencken might have said, is a new program to fleece the public and benefit a group of consultants and bureaucrats for a period of time. Then when its proven to be unworkable, it will be someone else’s fault.

Craft Beer Drinkers rejoice!

Another tidbit buried in the new tax law is an excise tax on beer, effective 1/1/2018. Now before you go all Boston Tea Party on this, read further. Under the new law, there is to be an excise tax on beer at the rate of $16 per barrel. This applies to domestic and imported beer producers who produce in excess of 2 million barrels annually. 

However, for domestic producers who produce less than 60,000 barrels annually the tax is only $3.50 per barrel. There is a $7 rate in between, but bear with me for a moment. The little guy gets a break.

So let’s distill this down to what it means to the average Joe Sixpack. If there are 31 gallons of beer in a barrel, and 128 ounces in a gallon (I had to look that up too), with the average bottle of beer being 12 ounces, that equates out to a whopping five cents per bottle at the higher rate, and only one cent for the small brewers.

Now, I admit I didn’t retain much from my year of economics classes in school. But I do recall that all business excise taxes are ultimately born by the business’s customers. Therefore this new tax ultimately hits drinkers of big production brews for a nickel a can, but if you are inclined to support microbreweries and craft brewers, you’ll only pay one penny a pop to do it, and you’ll be drinking better beer! So put down that can of Bud Lite, pick up a bottle of Ritual Red Ale, and you’ll be paying less in taxes. Be sure and have plenty on hand in April too – it might make writing tax checks a bit easier.

Cheers!

BTW – I made a misleading statement in yesterday’s Blog (my 100^th published blog!) about tax credits. The California scheme would entitle you to a California tax credit and a Federal deduction, not federal for both. Sorry if I confused you.

Aren’t we special?

The new tax law has a lot of stuff in it, some of it very complex and yet to be fully fleshed out. One provision that has received much press and dialog is the cap on state and local tax (SALT) deductions for individuals at $10,000. This provisions has elicited much wailing and gnashing of teeth in California and New York, where extremely high state income taxes as well as property taxes are the norm.

 To counter the perceived impact, the wise leaders in Sacramento have proposed a law (SB 227) that will allow CA residents the ability to pay into a “CA Excellence Fund” to be distributed amongst various state agencies. Taxpayers would take a Federal tax credit AND a donation deduction for the amount. If this were to stick you could pay $100 into this fund and receive $137 in tax reductions. What a deal!

 What they aren’t telling you is that IRS could disallow said credit and deductions for several reasons, such as receiving a “quid pro quo” benefit for the charitable donation, or on grounds the transaction is a tax sham solely to defraud the federal government and lacking economic substance or donative intent. Alternatively, Congress could simply pass a law making tax credit arrangements for charitable purposes illegal.

 If you were to enter into one of these arrangements and a year or two later find yourself in front of an IRS examiner assessing you back taxes, penalties and interest, do you really think that our CA politicians will be anywhere around to help then?  When the credits and deductions are disallowed do you think the state will cheerfully refund your money? If so, I have a bridge out in the desert I’ll sell cheap.

 This issue really isn’t the big deal that many make out of it. SALT deductions have been reduced or denied to the middle class for years due to the effect of Alternative Minimum Tax (AMT). If you have paid AMT on your taxes, you probably weren’t getting the benefit of SALT deductions anyway, so the loss of these deductions, offset by the lowering of rates, may not be felt much by many people.