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'Windfall for Wealthy'

July 03, 1988

Bill Honig started it and now the Los Angeles Times has repeated it ("Windfall for Wealthy," editorial, June 20). Everybody has become a tax expert, but maybe before all you opinion generators became tax experts, you should have talked to some real experts. Most Californians, who are subject to the highest tax rates, experienced material increases in their 1987 state taxes, even though the California legislation conforming state income tax laws to federal income tax law changes was supposed to be revenue neutral.

You state that the top state tax rate was reduced from 11% to 9.3% to offset higher taxes that the wealthy would have to pay on capital gains. That is not a correct statement. You have totally ignored all the other reasons, such as the phased elimination of the tax-shelter deductions; elimination of the deduction for sales tax; the phased elimination of the deduction for personal interest; miscellaneous deductions were subjected to a percentage of adjusted gross income limitation, thereby reducing them and in many cases eliminating them, and finally, the deductibility of business entertainment expenses was reduced by 20%.

Let us next look at this red herring called capital gains. If the tax revenue from capital gains is less than projected, that is because less capital gains were realized. Would you propose that California tax all people subject to the highest tax bracket on a minimum amount of capital gains even though they don't have them? Furthermore, as to those people who generated 1987 capital gains, such as in the real estate field, they saw large increases in their tax. The California tax on a $10,000 long-term capital gain jumped from $550 to $930, a 69% increase. At the same time, the federal tax jumped from $2,000 to $2,800, an increase of 40%. That's a combined increase of 46%.

Finally, lest your readers be further mislead, let's identify who you would consider wealthy. A single person with taxable income of $23,950 or more and a married couple with combined taxable income of $47,900 or more are subject to the 9.3% tax rate. These are the majority of people who would be impacted by the proposed increase in the maximum tax rate. One's definition of who is wealthy really depends on which rung of the economic ladder you are standing on.

I might also point out that the federal government, in calculating what was necessary to stay revenue neutral, determined that to offset the increase in the federal capital gains taxes and the elimination of deductions, they could reduce the top tax rate from 50% to 28%, whereas the California tax was reduced from 11% to 9.3%.

I am just as curious as you are as to why there is a $1-billion shortfall, but one thing I can assure you, based on practical experience from preparing 1987 tax returns, the majority of middle-class and wealthy Californians have paid a considerably higher tax for 1987 than they would have if there had been no changes in the California tax law. We will all have to look elsewhere for the cause.

HAROLD L. KATZ, CPA

Los Angeles

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