State Taxes on the Ballot 2020 -- Pot, Real Estate and More

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published 2 November 2020

David Muhlbaum: When America votes, it doesn't just pick its leaders. It also makes a lot of direct decisions on tax policy. State taxes, that is. Senior tax editor Rocky Mengle joins us in our main segment to talk ballot initiatives across the country, including one that would close the Lebowski loophole. Yes, that's a reference to The Dude. Sandy and I will also discuss the new retirement savings limits and how the coronavirus pandemic may have actually improved the new-car buying experience. That's all ahead on this episode of Your Money's Worth. Stick around.

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Sandy Block: That's right. The IRS released its annual inflation-adjusted thresholds for retirement savings plans this week, and it's really not good news for supersavers. The amount you can stash in a tax-advantaged accounts, such as an IRA or 401(k), won't change in 2021. The maximum you can save in a 401(k) or other employer-sponsored retirement plan will remain at $19,500 if you're under 50, $26,000 if you're 50 or older. The maximum you can save in a traditional or Roth IRA is also unchanged, $6,000 or $7,000 if you're 50 or older.

Sandy Block: Well, yeah, but they don't. Maybe this is to make accountants happy. I mean, in reality, most people don't even come close to that amount, but I've seen this every year. They don't say the threshold is $19,563. They say the threshold is $19,500, and maybe that's for simplicity's sake or whatever. But that's what it is. The IRS rounds, and this year, basically 1.3% is a rounding error.

Sandy Block: Well, maybe you should, if you're a supersaver. It is, well, by the time this comes out, it will be past Halloween, but we're recording this just before Halloween. But no, supersavers are people who saved the maximum amount. In reality, I mean, we follow these numbers very closely, but the reality is that most people don't come anywhere near saving the maximum that they can put in a 401(k) or even an IRA or a Roth. Although I think it's more common with an IRA or a Roth because you might have that amount. Most people don't save over $19,000.

Sandy Block: No, it is not too late. In fact, if you haven't approached the threshold for 2020, which is the same as what it will be for 2021 in your 401(k), there is still time to ask your employer to take more money out of your paycheck. If you get a bonus, you could ask your employer to defer the bonus to your 401(k). As I always point out in our tax stories, contributing to a employer-sponsored plan or a deductible IRA, if you qualify for one, is one of the very few ways that people who don't itemize, and that's just about everybody, can cut their taxes. Because that money does reduce the amount of taxable income that you will have to pay taxes on when you file your taxes next year. So there is still time to put more money in your 401(k) and you actually have until April 15th to fund a IRA or a Roth IRA. The deadline for that is the tax deadline. But if you've got that money, go ahead and fund it now. That just gives it that much more time to grow.

David Muhlbaum: We're back with Kiplinger senior tax editor Rocky Mengle to talk about the upcoming election. If those last two words made you flinch, don't despair, we are not discussing candidates of any party or, if you're listening after election day, the results. Remember, we recorded this in October. Rather, we're going to take a look at ballot initiatives across the country and we're going to narrow that even further by focusing on those with real pocketbook impact, tax measures. This is Kiplinger's Personal Finance, you betcha, and thanks for letting me get through all these disclaimers. Rocky, welcome.

Rocky Mengle: Yeah. Well, let's see. Currently, state law requires the Illinois personal income tax to be imposed at a flat rate, which right now is 4.95%. Now, the question on the ballot will ask the voters if they want to repeal that requirement and allow the state to enact a graduated income tax, that is, different rates for different income levels, and of course, the more you earn, the higher your tax rate under that type of system.

Rocky Mengle: Well, anyone, let's see, anyone making over $250,000 will see their tax rate go up. At that point, the rates go from 7.75% to 7.85%, and then to the 7.99%. Interestingly enough, the 7.99% rate -- the highest rate -- that'll work as a flat tax on all taxable income for single taxpayers with a taxable income over $750,000, or joint filers with income over a million dollars. So, they don't get the benefit of those marginal rates if you're in the very top of the bracket.

David Muhlbaum: That's interesting that Arizona is trying to make this surtax a dedicated thing for schools, as you said. It makes me think of California where their millionaires tax, like the last 1% that takes the total rate to 13.3%, it's part of the Mental Health Services Act. I guess that's part of how taxes increases like this are sold. They indicate these revenues are going to be for a particularly worthy purpose. As years go on, do they stay that way or does it all end up being fungible in the end?

Rocky Mengle: Well, I think it depends on how the law is written, how tight the language is. Just to give an example here in Maryland. A few years ago, they allowed casino gambling in the state and all the revenue from that, additional revenue, was supposed to go to education. But the law wasn't written really all that well and a lot of the money ended up just going into the general fund. So it really all depends on the language and how it's written up.

Rocky Mengle: Yeah. Mississippi is trying to legalize medical marijuana. I want to emphasize that this isn't for recreational use in Mississippi, just medical use. Actually, there are two versions of the measure there in Mississippi, one of which would even restrict marijuana usage to the terminally ill. And then, of course, sales tax would apply to the sale of medical marijuana in Mississippi if this ballot question passes. And then there are also four other states that have ballot questions this year to legalize and tax the recreational use of pot. They're in Arizona, which has Proposition 207 to legalize marijuana and impose a 16% excise tax on pot sales. In Montana, if marijuana is legalized it would be taxed at 20% of the retail price.

Rocky Mengle: Up in New Jersey, the state's regular sales tax would apply to the sale of marijuana and additional local governments could potentially tax on their own sales tax as well. And then in South Dakota, voters can legalize and tax both the medical and recreational use of marijuana, and sales of marijuana would be taxed at 15% in South Dakota if that passes. And then it's not marijuana, but then there's also Oregon, which has a real groovy ballot question to legalize and tax psychedelic mushrooms and the tax there would be 15%.

Rocky Mengle: Well, I don't know if there's any kind of evolution that I've picked up on in the way states go about trying to legalize and tax marijuana. But let me say a couple of things. First, taxes on marijuana don't bring in a ton of money. In several instances, the revenue is much less than what was originally expected. For instance, in 2019, California took in about $630 million from pot taxes. But for other states, it's much less, like in Colorado where we're at about 300 million. Now, of course any revenue is welcome, but these are small amounts in terms of overall state buckets.

Rocky Mengle: The second thing is that some people who've studied this believe that one of the reasons why marijuana tax revenues aren't higher is because many people who smoke pot are still getting their weed the old-fashioned way, through illegal sales. After all, street dealers don't charge tax and that might put a damper on tax revenues. That's something states that legalize and tax marijuana in the future might want to try to address, but maybe having taxes that aren't too high or too complicated might help with that.

David Muhlbaum: So, there's no such thing as an election without a whole raft of ballot initiatives in California. But this year we've got one that deals with something everybody loves to gossip about, which is the real estate of the rich and famous, which looks like that's most of what Proposition 19 is about. This is a one seriously involved proposal. Rocky, can you break it down, or at least the parts we should pay attention to?

Rocky Mengle: Yes, California's Prop 19. This ballot question would do a couple things like help lower property taxes for people 55 and older, but there's another provision that's getting even more attention because it clamps down on property tax breaks often used by the rich and famous. This tax break is being called the Lebowski loophole. I'll explain why in a second, okay. But this is a little technical, so bear with me for a minute as I lay it out for you. First, it's important to understand that there are two values placed on homes in California. There's the market value, which is how much your home is actually worth and the base year value, which is the values to calculate the annual property tax -- and we'll just call that the tax value. Now, the market value can go up by any amount in any year, and it often increases pretty quickly in California, or at least in some parts of the state. But on the other hand, under California law, the tax value can't increase more than 2% per year.

Rocky Mengle: Particularly in certain parts of California. But now this gap is a good thing for homeowners and the bigger the gap, the more the homeowner saves because property taxes are based on a smaller value. However, when the home is sold and there's a new owner, the home's tax value is reset to equal the market value. So there's no more gap to help the home's new owner. That's just some background. Now, under current California law, if your primary home is sold, inherited or otherwise transferred to your child or to your grandchild if their parents are dead, your tax value is transferred to your child or grandchild. In other words, the reset to market value is avoided, which keeps property taxes low for your child. If other property like a vacation home is sold or inherited, only the first million dollars of market value avoids the reset. Now, the problem arises in many people's eye when someone inherits their parents' primary residence, but then they turn the home in a rental property instead of moving into the home themself.

Rocky Mengle: Well, first of all, I think ballot questions . . . they provide a way for the people to go around the state legislature and the governor and pass laws themselves. Over 100 years ago, California went in big for this form of direct democracy. There was a feeling then that the state government was especially corrupt and in the pocket of special interests. I guess that feeling persists today with many people. But there's also a legal reason why California has so many ballot questions each election, and that's because state law requires them for state constitutional amendments, certain statewide bond measures and to change previously approved voter initiatives. So if you passed one ballot initiative, you often get several more later just to modify them. For instance, back to Proposition 13, which was approved back in 1978, and it restructured the state's property tax system, blah, blah, blah. It has led to many other ballot questions over the years just to tweak it, like Proposition 19 on this year's ballot. That's really a tweak of an earlier initiative, so that's why you get a lot in California.

David Muhlbaum: Right. Certainly there are many, many cases where there are local governments who will have ballot initiatives. That's the sort of thing that I always try have to do when I go in there. I usually pretty much have my mind made up on the stuff at the top, but then I get to this really long piece of legalese and I'm like, "Oh my God, I really should have looked this up. What am I voting on here?" So yeah, do your research.

David Muhlbaum: Yes. What is coronavirus? Yeah, it has had an effect on how we buy cars. I mean, not just the question of how many and how much we're paying for them, but how the process gets done. In short, it pushed more of the process online, which is something many buyers, particularly younger ones, were clamoring for for years. I want to make a distinction here, though, between used cars and new cars. In the used car market, which isn't as hung up on the car maker franchise business model, online shopping is a definite thing. It's been for years. Carvana, Shift are a couple of the big names in this field. But new car shopping was slower to respond. I wrote a piece about this a year or so ago where I tried as best as I could to be an introvert new car shopper. I wanted to see how close you can get to buying a new car at a reasonable price with as little actual human interaction as possible. But again, this was last year, when no one knew what social distancing was.

David Muhlbaum: Yeah. I mean, I might be a little rude, but okay. But what I found was you could definitely roam dealer inventory. You could look for specific models that suited your needs. But when it came down to an actual price, sometimes they would do this thing where they'd put up a price and they'd say, "Call for a better price." Well, they didn't say better but, call for actual price. You're like, "Okay, so that's not really the price, is it, huh?" But the point was the dealer still wanted you to come on down -- or if you put in an email or a phone number, God help you. Here comes the deluge.

David Muhlbaum: Yeah. I mean, things like the hard bits, the actual physical products like roof rack or floor mats that they want to sell you, they're generally pretty high quality stuff that has the approval of the manufacturer, et cetera. Yeah, you could probably beat the price on them online, but the appeal has always been that all those aftermarket purchases can get enrolled into the financing. So, why not get the floor mat protection policy, too? It's just another $5 a month. What if someone stole your floor mats?

David Muhlbaum: Okay. So, right. So when the virus hit and shut down followed, dealers were in a pickle. If your lifeblood is selling cars and you can't sell cars, well, that's bad. The car dealers even successfully lobbied to be considered an essential business, but the customers still didn't want to come back into the cubicle with the very nice lady. I mean, she may be very nice and all, but there's a pandemic going on. So the dealers, by and large, bit the bullet and did what they needed to do to move the process online or at curbside. The software for this has been around. In short, things got better for the introvert.

David Muhlbaum: I'm not sure. I mean, anecdotally, I'm hearing about things going back to normal, which may not be good in this case. I don't know. My neighbor just traded in her Honda Accord for another one, new, and other than wearing masks and making appointments, the process she described to me sounded very old school. But the thing is, younger shoppers are behind a lot of the current surge at sales -- and they're the ones who are most into making the purchases online. It's really all they've ever known. Why wouldn't you buy a car online? Because, yeah . . . so I don't know. Will they collectively have the power to make a lasting change? I mean, speaking as an older introvert, I sure hope so.

David Muhlbaum: That will just about do it for this episode of Your Money's Worth. I hope you enjoyed it. For show notes and more great Kiplinger content on the topics we discussed on today's show, visit Kiplinger.com/podcast. You can stay connected with us on Twitter, Facebook or by emailing us at podcast@kiplinger.com. If you like the show, please subscribe to Your Money's Worth wherever you get your podcasts, and please give us a rating when you do. Thanks for listening.

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Block joined Kiplinger in June 2012 from USA Today, where she was a reporter and personal finance columnist for more than 15 years. Prior to that, she worked for the Akron Beacon-Journal and Dow Jones Newswires. In 1993, she was a Knight-Bagehot fellow in economics and business journalism at the Columbia University Graduate School of Journalism. She has a BA in communications from Bethany College in Bethany, W.Va.