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What Phil Mickelson Got Right About Taxes

Rick Newman

Phil Mickelson sounds like a pampered one percenter last week, whining about paying his fair share. But the professional golf superstar has identified a genuine problem that affects a lot of ordinary Americans and may even be depressing the nation's whole economy.

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The usually affable Mickelson generated controversy by complaining about the high taxes he's forced to pay as a multi-millionaire living in California. With recent federal and state tax hikes, Mickelson claims that he now pays a total tax rate of more than 60 percent. The big chunk of his earnings grabbed by the government may force him to make "drastic changes," he says, such as moving from high-tax California to someplace like Florida, which has no state income tax.

Hardly anybody feels sorry for a guy who earns roughly $50 million a year playing an aristocratic game most of us have to pay to enjoy. Mickelson, recognizing his gaffe, later apologized for griping. But whether he realizes it or not, Mickelson also highlighted a widespread problem that's getting worse: the punishing cumulative toll of federal, state and local taxes, along with other rules imposed by all levels of government. Add them all up, and in some places it seems like there really is a government bureaucrat demanding something everywhere you turn.

Federal taxes have generated the most attention lately, on account of the recent fiscal cliff deal that raised the top federal tax rate from 35 percent to 39.6 percent. Meanwhile, other new measures will take a bigger bite out of investment income for the wealthy.

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Still, the federal tax burden remains relatively low, even on the rich. Since 1979, the federal tax burden has drifted down for every income group, according to the Congressional Budget Office. The recent tax hikes on the wealthy will push their overall tax burden up a bit, but it will probably be no higher than it was in the 1990s. Plus, top earners have enjoyed most of the income gains of the last 30 years, which for most of them translates into more after-tax income overall.

State and local taxes are a different story. Many states have raised tax rates to cope with falling revenue in the aftermath of the recession that ended in 2009. For a while, federal stimulus spending helped states and cities offset lost tax revenue, but that money has stopped flowing. On top of state-level tax increases, many municipalities have raised property taxes, even as property values were falling.

The average state and local tax burden rose from 9.3 percent of income in 2000 to 9.9 percent in 2010, according to the nonprofit Tax Foundation. Since 2010 is the last year for which data is available, those numbers don't capture recent tax hikes, such as $9.4 billion worth of new taxes that were approved by states for 2013, according to the National Association of State Budget Officers.

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California, traditionally a high-tax state, has enacted some of the most sweeping new taxes, including Proposition 30, which passed last November. That measure raised the state sales tax by a quarter point, to 7.5 percent, and hiked state income taxes on households earning more than $250,000 per year. For millionaires like Mickelson, the state income tax rate rose from 10.3 percent to 13.3 percent, retroactive to 2012.

Mickelson can certainly use smart tax planning to cut his true tax rate from the 62 or 63 percent he claims to something like 50 percent. But it would be even lower if he moved to a just about any other state. Many businesses have followed a similar strategy, relocating from an original location to states (or even countries) with tax and regulatory codes more to their liking.

While that type of maneuver may benefit certain states, businesses and individuals, it also represents a kind of governmental arbitrage that's unhealthy for the overall economy. The nation as a whole certainly doesn't benefit from a zero-sum battle among states for big spenders. The transaction costs of relocating alone are wasteful.

At the same time, ordinary workers are getting squeezed by taxes that seem to be going up everywhere. The fiscal cliff deal ended a temporary reduction in federal payroll taxes, amounting to a de facto tax hike that will take $1,000 out of the typical worker's paycheck this year. Fees for things like car registrations and fishing licenses have gone up in many places. Many budget experts believe it's inevitable that federal taxes on the middle class will have to rise, in order to make a dent in the $16 trillion national debt.

Free-market advocates argue that an exodus of workers and businesses from high-tax states to lower-tax states ought to produce a competitive response from the losing side, forcing them to adopt more appealing policies. There's some evidence that is happening. After years of jobs and businesses to lower-cost non-union states, Michigan declared itself a "right to work" state last year, with its own limits on union activities. In New Jersey, combative Republican Gov. Chris Christie has vowed to put an end to ever-rising taxes that drove some residents elsewhere.

California hasn't turned that corner yet. The Golden State suffers from high costs for welfare recipients and public employees represented by powerful unions, along with a shrinking tax base. So far, the response has been to raise taxes on those able to pay. But you don't have to be a rich golfer to see that widely different rules from state to state are creating needless disparities in living standards. If Mickelson leaves, he certainly won't be the last to flee from California.

Rick Newman is the author of Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.

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