Death and Taxes?

I’ve already told you about the ridiculous housing market here in the Bay Area – about how my rent is 5x my mortgage and how my Arkansas house would be worth 12x more if it was in the neighborhood surrounding our apartment building. That isn’t real news, of course. You know those things before you move here.

Today, let’s talk about that other thing people “know” about California . . . the high taxes! I’m not trying to start a big political discussion here or even discuss whether or not any individual tax rate is warranted. Frankly, I don’t really care what you think about taxes; I just want to talk about the actual impact this has outside of all the theory. If you feel some kind of moral outrage when paying taxes, this post really isn’t for you.

First! The basics:
-Are California’s taxes among the highest in the United States? Overall, yes.
-Does this make any difference to me on a daily basis? No, not really.

Next! Some caveats:
-I don’t own real estate in the state of California, so I don’t have the same tax burden I did in Arkansas.
-My salary tripled when I moved here, so my comparisons are a bit apples to oranges. But it is interesting to compare what I expected based on all of the California-bashing to what I actually pay.

Do I feel the tax burden when I get paid? No.
I was fairly disappointed when I saw the net of my first check here. When I actually looked at the breakdown however, I realized that most wasn’t going to state taxes. In fact, the state taxes are fairly in proportion to what I was paying in Arkansas considering the salary increase. Where I’m really taking a hit is with federal taxes and an increase in retirement contributions to make up for some lost time when I was in my early 20s.

Let’s use my family as an example. We are talking about effective tax rate here (not marginal).
In California – we fall at 7.4% for state and 20.6% federal. In Arkansas – we averaged 4.8% state and 13.3% federal. When we are talking about money out of my pocket, our family income more than doubled and our taxes tripled – at both the state and federal level. Obviously you feel this difference when you are looking back over a year or more, but from paycheck to paycheck the increase is minimal. If you are paying attention and optimizing your finances, you can minimize it even more.

We consider this increase negligible for our day-to-day life, but important for lifetime financial planning.

Do I feel the tax burden when I’m at the grocery store? Yes.
The combined sales tax (state, county, city) for where I do my grocery shopping is 8.75%. For where we do the rest of our shopping (clothes, household goods, fun) it is 9%. In Arkansas, it was 6.5% where we did grocery shopping and 8.5% where we did everything else. So yes, higher across the board. Interestingly, the county and city tax rates were actually higher in Arkansas. Also interestingly, we shop for groceries in both Arkansas and California in a different city from where we do everything else. Just a fun tidbit.

I think it is pretty clear that we do feel that additional 2.25% in taxes on groceries. Mix that with the overall increase in the price of goods and it has made a big change in our monthly budget. Outside of the grocery store? Not so much.

Do I feel the tax burden when I’m renewing my car registration? Yes.
Oh my goodness did I hear some horror stories about how much it was going to cost to register my car. They were – across the board – highly exaggerated. But that isn’t to say we haven’t felt a significant increase here. It cost me $30 (that includes decal fee and online payment fee) per car in Arkansas. It costs $250 for my car and $300 for the van here in California.

The actual registration in California is $46. The rest is a whole host of various state and county fees. I’m not going to try to breakdown where our money actually went, but the DMV says this is the general breakdown:

Local government (cities/counties) 40.7%
California Highway Patrol 25.7%
DMV 13.9%
State highways (Caltrans) 13.0%
Air Resources Board 1.7%
Other state agencies 4.3%
State General Fund 0.7%

Do I feel the tax burden when I file my taxes? Eh.
On one hand, I didn’t have any surprised the first time I filed California taxes. We didn’t owe and we got a small refund, but nothing that would make me think I need to reevaluate how much money we’re loaning the government. On the other hand, this is where you see the full-year total and feel the difference of the higher tax rate. On yet the other hand (that is #3, if you are counting), what we get for our tax money here in California is all kinds of amazing. It is much easier to stomach the amount leaving your pockets if you feel like you are actually benefiting. Just to toss one more hand in there, our tax burden is offset a bit by the little man’s disability, medical costs, and services. So filing is a mixed bag, I guess.

So, that is the actually breakdown – massively simplified, of course – of what it is like to live out here in tax-land. The view from the ground, not from the political office. My takeaway? If you are opposed to a lot of the things that the government does out here in California? You probably wouldn’t be happy with your bill. If you are opposed to paying taxes in general? You probably aren’t ever happy. If you are anybody else? You probably will just adjust your budget and move on.