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Archive for May, 2024

Texas, California, and New York expenditure, debt, tax burden for 2024

Posted by William Byrnes on May 28, 2024


I am contrasting state and locality living for 2025 updates. I am sharing what I found for Texas, California, and New York state and local budget expenditures, followed by accumulated state and locality debts for FY2024. Then, I contrast the total income tax and the property tax for living in Dallas, Fairmont-Los Angeles, and Nassau County. There is no particular reason for these three locals; with the footnote links, you can do your own calculations.

Texas’ state budget for FY2024 is approximately $160 billion (it is enacted biennially, the total spending amount for 2024 and 2025 being  $321.3 billion). Texas had a rolling forward $32.7 billion surplus from its previous biennial budget and an additional $23.5 billion in its rainy day (Economic Stabilization) fund. Public schools and higher education comprised 50 percent of the budget. Health and human services comprised 30 percent. For the upcoming biennium budget, Texas estimates revenue from state funds to reach $342.3 billion that may, under its balanced budget requirement, be appropriated. The Economic Stabilization Fund (ESF) is projected to grow to $27.1 billion through FY2025.

Contrast California’s state budget which for FY2024 was $327 billion with an anticipated deficit of $14 billion, with a projected FY25 deficit of between $58 billion and $73 billion.[1] California, like Texas, maintains a similarly sized rainy day fund (Budget Stabilization Account) of approximately $22 billion, and $900 million of additional safety net reserves. California’s FY2025 budget proposes total state expenditures (excluding federal funds) of $291.5 billion. This FY2025 budget proposal projects a reduction in reserve balances to $11.1 billion for the rainy day fund but with an additional $3.9 billion held for the Public School System Stabilization Account (PSSSA).[2] Considering the forecast FY2025 deficit, the Governor and Legislature have been working toward some FY2025 spending reductions and spending delays.[3]

Texas’ potential budget spending approximately doubles when factoring in local general revenues, to $310.1 billion for FY2021 for example. California’s combined state and local direct general expenditures were $574.8 billion in FY2021.[4]

Consider one other state. New York state’s All Funds budget which includes federal government funds for FY2024 is $236.8 billion of which $140.2 billion emanates from state revenues.[5] The budget is balanced with a negligible gap between revenue and expenditure. New York’s combined state and local direct general expenditures were $315.7 billion in FY 2021.[6]

The Texas state debt is $70.94 billion.[7] Texas’ nonstate local debt (e.g. county, school board, localities, water utilities, community colleges, hospitals) debt stood at $308 billion. California’s state debt of $70.9 billion is nearly the same as Texas. But if Lease-Revenue bond debt is included, it totals $78.7 billion with an additional $30 billion debt authorized but not yet sold. Including county and local debt of approximately $325 billion,[8] as well as the unfunded pension obligations that come due as employees retire, the total California state government debt reached approximately $1.6 trillion in 2022.[9] The New York state-related debt which includes debt issued by the state, by public authorities on behalf of the state and other debt obligations for which the State is responsible is projected to grow from $58.5 billion in FY 2023 to $66.7 billion by the end of FY 2024.[10]  In addition, New York City has issued over $90 billion of outstanding debt as of FY2023.[11] The cumulative debt of New York’s 1,178 state and local public authorities is $329 billion as of 2023.[12]

For a married couple earning $200,000 annually, the annual state and local income tax burden for Texas would be nil because Texas does not impose an income tax, for California $12,222, and for New York $9,897.[13] Property tax for a home assessed at $600,000 in Dallas is $10,860, in Fairmont-Los Angeles is approximately $5,000, and in Nassau County $6,300.[14] Income and property tax together for the three states of Texas, California, and New York is comparatively $10,860, $17,222, and $16,197, respectively. Federal income tax is estimated at $41,353.[15] Thus, total tax for the couple earning $200,000 and living in a $600,000 home in the three states of Texas, California, and New York is $52,213, $58,575, and $57,550.

I can add a couple more comparisons that impact the tax calculations. Calculating the average sales tax paid for the hypothetical couple in each state is relatively easy. Dallas’ sales tax rate is 8.25%, Los Angeles’ is 9.5%, and New York City’s is 8.875%. Very roughly, for the couple’s $50,000 annual sales taxable expenditure (restaurant tax considerations are left out), New York will be about $300 more sales tax a year considering a 20% higher cost for expenditure over Dallas, and roughly $687.50 more in Los Angeles using a 10% price difference.

A harder one to determine and then calculate but still impactful is the average annual transportation cost for the three states’ municipalities selected. For example, the average gasoline tax paid annually by a family. Yet the gasoline tax is a bit tricky because California is about to initiate a mileage tax to begin replacing its gas tax because, with hybrids and electric vehicles, petrol tax revenue has plummeted well over $1 billion annually, causing a deeper hole in the state road budget. Also, comparing a gas or mileage tax in Texas and California is relatively straightforward where, in general, cars are an aspect of life. But for New York, the tax comparison may instead need to factor in the average annual spend on public transport such as daily trains, busses, and the subway.

Then there is the matter of tolls. These can be estimated for Dallas and for Los Angeles. New York is a bit trickier. Residents outside Manhattan who drive (for example, New Jersey) pay the bridge (e.g. $15.38 for the GW with EzPass during the day) or tunnel toll and, beginning in June, the new $15 a day New York congestion tax.[16] Take an example of our couple, one partner must go to the Manhattan office, say, four days a week (note: banks are recalling their employees to the office, and FINRA/securities dealer rules do not allow work from home without the same periodic compliance inspections required at the bank, administratively challenging to say the least). That’s today $60 a week (i.e. about $280 a month) versus the doubling of it from June 1, $560 a month. That extra congestion toll, rounding it to $3,300 annually, must be enough to change behavior (because, with the regular toll, it is $6,600 annually, post-tax, i.e. about $10,000 earnings spent on tolls). Thus, the hypothetical person will switch to the bus or train into the city, then the subway or transfer bus. In conclusion, regarding a comparison between a Texas gasoline tax versus a California mileage tax and the New York public transportation cost, my guess is that Texas is less cost for the couple but perhaps at the expense of environmental impact. That’s a cost-discussion for another day.

Let me know about your state and locality burdens in the comments. And thank you for your readership of my weekly Tax Facts articles. Prof. William Byrnes

[1] 2024-25 Budget California’s Fiscal Outlook, Legislative Analyst’s Office, December 7, 2023. https://lao.ca.gov/Publications/Report/4819; 2024-25 Budget Deficit Update Legislative Analyst’s Office, February 20, 2024. https://lao.ca.gov/Publications/Report/4850.

[2] Proposed Budget – Fiscal Year 2025, National Assn of State Budget Officers. https://www.nasbo.org/mainsite/resources/proposed-enacted-budgets/california-budget.

[3] 2024-25 Budget Deficit Update, Legislative Analyst’s Office, February 20, 2024. https://lao.ca.gov/Publications/Report/4850.

[4] State Fiscal Briefs, California, April 2024. https://www.urban.org/policy-centers/cross-center-initiatives/state-and-local-finance-initiative/projects/state-fiscal-briefs/california.  Texas, April 2024. https://www.urban.org/policy-centers/cross-center-initiatives/state-and-local-finance-initiative/projects/state-fiscal-briefs/texas.

[5] Summary of Recommended Changes to the Executive Budget  State Fiscal Year 2024-25, NY State Assembly Ways & Means Comm., May 2024. https://nyassembly.gov/Reports/WAM/2024summary_changes/.

[6] State Fiscal Briefs, New York, April 2024. https://www.urban.org/policy-centers/cross-center-initiatives/state-and-local-finance-initiative/projects/state-fiscal-briefs/new-york

[7] Texas Bond Review Board, August 31, 2023. https://www.brb.texas.gov/state-of-texas-debt/.

[8] Annual Debt Transparency Report (ADTR) – Principal Outstanding by Issuer Group, FY2023 data, Ca. State Treasurer. https://debtwatch.treasurer.ca.gov/reports/adtr-outstanding-principal.

[9] California State and Local Liabilities Total $1.6 Trillion. California Policy Center, February 28, 2022. https://californiapolicycenter.org/california-state-and-local-liabilities-total-1-6-trillion/.

[10] Debt Service, Division of the Budget, NY State. https://www.budget.ny.gov/pubs/archive/fy24/ex/agencies/appropdata/DebtService.html. See also, FY 2024 Bond Caps and Debt Outstanding. https://www.budget.ny.gov/investor/bond/BondCapChart.html.

[11] Annual Report on Capital Debt and Obligations Fiscal Year 2024, NY City Comptroller. https://comptroller.nyc.gov/reports/annual-report-on-capital-debt-and-obligations/.

[12] Public Authorities by the Numbers 2022, Reinvent Albany, Jan. 13, 2023. https://reinventalbany.org/2023/01/public-authorities-by-the-numbers-2022/.

[13] Income tax estimation collected using Talent.com’s calculator. https://www.talent.com/tax-calculator.

[14] State property tax was estimated using SmartAsset for Dallas, Los Angeles, and Munsey. https://smartasset.com/taxes/california-property-tax-calculator.

[15] Married couple earning $200,000 without pretax contributions for medical or retirement. https://smartasset.com/taxes/income-taxes.

[16] MTA projects Central Business District Tolling Program. https://new.mta.info/project/CBDTP#:~:text=Starting%20on%20June%2030%2C%202024,district%20in%20the%20United%20States.

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Texas A&M University Law Professor Honored with Distinguished Achievement Award

Posted by William Byrnes on May 24, 2024


Professor William Byrnes of Texas A&M University School of Law received the Association of Former Students Distinguished Achievement Award for Professional Development, which includes a monetary gift and an engraved gold Texas A&M watch. Texas A&M President Mark Welch stated in his letter to Professor Byrnes:

“The Distinguished Achievement Award, generously funded by The Association of Former Students, is among the most prestigious awards presented to Texas A&M faculty and staff. The review process is rigorous and recipients are selected by a campuswide committee, a true testament to the esteem in which you are held by your colleagues.”

Professor Byrnes was recognized for an academic career pioneering online legal education while authoring a dozen legal treatises, 50 book chapters, and over 1,500 financial media articles. Since joining Texas A&M Law a decade ago, Professor Byrnes initiated and helped grow the online graduate programs that now enroll more than 1,500 professionals.

“Congratulations again on this honor and thank you for your outstanding contributions to our university!”, President Welch wrote in closing.

Professor Byrnes responded, “I am humbled that my Dean Bobby Ahdieh, faculty colleagues, and several Deans from other law schools, wrote letters of nomination to the committee in support of my publication record and my impact on legal education.” 

“This award and research grant allows me to focus my summer on the research and writing of two new academic journal articles for the fall submission cycle”, added Professor Byrnes. “One of the articles will be a policy analysis of Congress and the IRS’ definition of charitable activities. The other is in the formative stage but will analyze the practicability of leveraging a Shapley approach for intangible intensive groups – a topic my Texas A&M colleague Dr. Lorraine Eden is the prominent academic expert on and supporter of.

Beginning in 1955, via a rigorous review by a university-wide committee composed of faculty, staff, students and former students, the Distinguished Achievement Awards have been granted to those who exhibit the highest standards of excellence at Texas A&M. Donors to The Association of Former Students provide funding for this award program.

Find out more about Texas A&M’s online graduate wealth management program: https://law.tamu.edu/distance-education/wealth-management

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Who should inherit a $750,000 retirement account: a former romantic partner of 25 years ago named as a beneficiary back then or the surviving family and current romantic partner of the past 25 years?

Posted by William Byrnes on May 24, 2024


Howdy! I’m Professor William Byrnes of Texas A&M University School of Law, where I founded the graduate program for wealth management. Today, I want to share with you a cautionary tale about estate planning, specifically focusing on retirement accounts, designated beneficiaries, and former romantic partners.

Three-Part Discussion Overview:

  1. Misconceptions about Retirement Accounts and Wills: Clients often assume their retirement accounts will automatically pass to the heirs named in their will. This is a common misconception.
  2. Case Study: Federal Court Ruling: We’ll explore a federal court case where an ex-girlfriend from a two-year relationship, named as a 401(k) beneficiary over 27 years ago, was found entitled to inherit a substantial balance—over $750,000.
  3. Advisors’ Role in Ensuring Up-to-Date Beneficiary Designations: The conclusion emphasizes the importance for advisors to proactively communicate with clients to regularly update their beneficiary designations on all accounts, including retirement plans and insurance policies.

Part 1: Misconceptions about Retirement Accounts and Wills

Beneficiary designations are often overlooked and neglected during the estate planning process. Clients typically execute a will or create a trust with their financial advisor and assume that all their assets, including retirement accounts and insurance policy proceeds, will pass to the heirs named in their will, such as their children or grandchildren. However, retirement accounts, including 401(k)s and IRAs, follow their own specific rules.

For example, the fiduciary and operating standards of a typical 401(k) retirement plan are governed by a federal statute known as ERISA. ERISA, shorthand for the Employee Retirement Income Security Act of 1974, is a comprehensive statute that establishes the standards of conduct and responsibility for fiduciaries of employee benefit plans.

When opening a 401(k) plan account with the plan administrator appointed by the employer, the employee can designate one or more beneficiaries to inherit the account. If no beneficiary is designated, the account balance generally will be distributed to the deceased account holder’s estate.

The estate administrator should, in turn, distribute the proceeds from the 401(k) account according to the deceased person’s will. But if no will was created by the deceased, which is true in a majority of cases, then the estate must distribute the assets of the estate, including the retirement account proceeds, according to the intestate succession laws of the state or country with jurisdiction over the estate. Normally, the intestate succession laws provide first for a surviving spouse, and secondarily for children. If the deceased isn’t married and does not have children, then the succession law will favor the immediate family. In the federal court case I’ll mention next, the deceased was not married and did not have children.

Part 2: Case Study: Procter & Gamble v. Estate of Jeffrey Rolison

Let’s dive into a real-world example that illustrates the importance of maintaining current beneficiary designations.[1]

Jeffrey Rolison, a long-term employee of Procter & Gamble for 30 years, participated in the Procter & Gamble employee retirement plan. In 1987, when Mr. Rolison provided his personal information to his employer’s retirement plan administrator, he named his then-girlfriend as the beneficiary in 1987. The couple ended the relationship two years later, in 1989. Then for 25 years until he died in 2015 at the age of 59, Mr. Rolison had a close relationship with a girlfriend. However, during these 25 years, he did not update the beneficiary designation for his retirement plan.

Upon his death, the Procter & Gamble retirement plan paid out the account balance, which had grown to $754,000, to the ex-girlfriend. The administrator of Jeffrey Rolison’s estate sued the Procter & Gamble retirement plan, arguing that the retirement plan administrator failed to adequately inform Rolison about changing the beneficiary designation. From the perspective of the estate, whose immediate family was his two brothers, Jeffrey Rolison did not intend for the ex-girlfriend of 25 years ago to inherit over $750,000.  

The U.S. District Court for the Middle District of Pennsylvania ruled against the estate in April 2024. The court found that Procter & Gamble had provided sufficient notifications to Mr. Rolison over the years with instructions regarding changing the account beneficiary. Moreover, Mr. Rolison had accessed his retirement account online multiple times and did not change the beneficiary. Thus, the court concluded that Rolison had the opportunity to change the beneficiary but chose not to do so.

Part 3: Ensuring Up-to-Date Beneficiary Designations

This case highlights the critical role of advisors in estate planning. Advisors should engage with their clients to review all past and current retirement account plan documents and any amendments to ensure that the rules within these documents align with the client’s desired estate plan.

When a participant designates a beneficiary, that individual will likely receive the funds from the plan, regardless of any intervening facts. Retirement plan administrators require a beneficiary’s name, contact information, and often a Social Security number for verification to be able to reach out to the designated beneficiary to facilitate the distribution after the death of an account holder.

Conclusion

Advisors need to regularly contact and communicate with their clients to ensure that all designated beneficiaries are current on retirement accounts and other assets, such as insurance policies. Courts will almost always uphold a retirement plan account holder’s beneficiary designation, even if it seems the decedent would have chosen a different result in hindsight.

If you’re interested in reading more about this topic or hundreds of our other articles, please visit Tax Facts (American Legal Media). For wealth management studies, contact the admissions department at Texas A&M University School of Law for information about our courses and degrees.

[1] The Procter & Gamble U.S. Bus. Servs. Co. v. Estate of Rolison, Civil Action 3:17-CV-00762, 6 (M.D. Pa. Apr. 29, 2024).

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