Tax laws

How Texas Tax Laws Attract the Rich

Texas is well known as an income tax free haven. This is probably one of the reasons why Tesla CEO and founder Elon Musk, the richest person in the world, decided to move to Tesla headquarters in California, which has income tax on highest in the country, in Austin, Texas. However, that’s not the only way mega-rich like Musk can maximize their wealth by minimizing their taxes in the Lone Star State.

Billionaires like Mark Cuban and Michael Dell have already made Texas their home. It’s one of nine states, along with Florida, Tennessee, and Washington (where Bill Gates and Jeff Bezos currently reside) without state income tax. “Compared to California, which has one of the highest local and state tax burdens, Texas has significant advantages for high-income earners,” wrote Ray Perryman, president and CEO of the research firm and Waco-based economic analyst, The Perryman Group.

Texas has one of the lowest local and state taxes in America. It also has no state estate or estate tax, while 16 states – including Iowa, Kentucky, and Maryland – have at least one or both policies. Dick Lavine, senior tax analyst for Every Texan, says high-end homes in Texas also tend to be dumped for tax purposes.

“Texas does not require disclosure of the sale price at which real estate changes hands,” Lavine wrote in an email. “All states except 12 have some form of disclosure.” Large commercial and industrial properties in Texas also tend to be undervalued, he adds. “In addition to the lack of disclosure, large companies often abuse ‘equal and uniform’ calls to lower their valuation to the ‘median value of comparable properties’, regardless of actual market value.”

Last week, Musk sold nearly $ 7 billion in shares of his electric car maker after receiving approval from the majority of his 62.5 million Twitter followers in a Nov. 6 poll. on the social media platform. “I don’t take any cash or bonus paychecks from anywhere,” Musk tweeted on Nov 6. “I only have stocks, so the only way I can personally pay taxes is to sell stocks.”

Some of the shares were sold to satisfy a looming tax bill of more than $ 15 billion next year associated with the exercise of stock options, according to Tech Crunch. The contracts, which came from a stock option grant Musk received in 2012, were due to expire in August of next year, meaning he is expected to exercise them before that date, according to Time. . The exercise of such contracts results in income taxes, which are usually covered by the immediate disposal of part of the newly acquired shares.

Lisa De Simone, an accounting professor at the McCombs School of Business at the University of Texas, says it’s very likely California will at least partially tax Musk for exercising his options. Musk’s options are likely unqualified, says De Simone, which means Musk would be taxed on the difference between the stock’s value on the exercise date and how much the option allows him to pay for the stock. . California claims the right to tax as salary income the difference between the price of the shares on the exercise date and the price at which you are able to pay the option, De Simone said.

Musk admitted in June that he will still have to pay income taxes in California despite moving to Texas last year. “The fact that Musk moved to Texas simply means that California would allocate income between California and Texas based on the days worked in each state during the period from the date of the option grant to the date of the grant. ‘exercise,’ De Simone wrote. “Also, they could challenge when Musk officially became a resident of Texas versus California, which would allow them to tax more of that income.”

Lavine also notes that the Texas General Franchise Tax – a lien tax imposed on a taxable entity incorporated or organized in Texas or doing business in Texas, is a unique form of modified gross revenue tax that may favor certain industries. activity, compared to the corporate income tax imposed by most states.

“Texas can attract business because of its reputation as a low-regulatory state, especially compared to California,” De Simone wrote in an email. And because of the state’s lack of personal income tax, “a Texan does not have to close the“ loopholes. ”In contrast, the California Franchise Tax Board has a reputation for enforcing strictly its tax laws to prevent taxpayers from taking advantage of “loopholes”.

Texans, rich or not, still pay a variety of state and local taxes in the form of property taxes and sales taxes, Perryman says. Owners of expensive homes and other real estate bear a particularly large share of the tax burden. “Having said that,” Perryman wrote, “the property taxes on even a very luxurious home are miniscule compared to income taxes that run into the hundreds of millions, if not billions of dollars.”

Perryman adds that sales taxes, by comparison, are “regressive” and weigh more heavily on low-income people who spend a high percentage of their income each year. The state’s tax structure relies heavily on property taxes as well as some aspects of corporate franchise taxation. However, Perryman says the state has substantial financial advantages over California and other states.

“While Texas business taxes are not always competitive, especially for capital-intensive businesses, the state has very effective incentive programs to overcome some of these drawbacks,” Perryman wrote. “As far as individuals are concerned, Texas is a great place to be rich.”