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Richard Rider

The triple California whammy of the stock market drop

Most of us are less wealthy than last week. The stock market and crypto-currencies took dramatic tumbles. But it’s actually a triple whammy — especially for Californians.
Not only did our investments, IRA’s and 401k’s take a belly punch. The drop in equity values means that our mandatory obligation to our CA state and local public servants jumped as well, as the unfunded pension obligation just soared higher.  And then there’s that coming CA capital gains tax shortfall.
Only our risk-free public employees are pretty much unconcerned about economic downturns. Because the government worker pensions are guaranteed, the hapless taxpayers will simply have to write bigger checks to make up the bigger shortfall.
And to add pain to suffering, a stock market downturn translates in into lower capital gains on tax returns.  Few realize that the MAJOR reason we have a CA “budget surplus” (ignoring theMadoff-type accounting used) has been the flood of capital gains tax revenue into state coffers fueled largely by our rising stock market.
Our federal and CA combined capital gains tax is the second highest in the world.  This windfall has been used primarily to raise the pay of our “long-suffering” public employees — a “ratchet” budget item that now recurs every year.  If the capital gains tax revenue plummets, well, you know who gets to make up the difference.
With the change in state tax deductibility on federal tax returns, it’s likely that more taxpayers — especially wealthy taxpayers — will leave our high-tax Golden State — putting these pension obligations in their rear view mirrors. Those that remain will have to make up THAT shortfall as well.
Uh oh.