Economy’s Rise Pulls the Richest Along With It
Very happy days are here for some Californians as the state’s post-recessionary economy produces a bumper crop of new millionaires.
The number of people who reported earning more than $1 million a year rose a startling 66% between 1994 and 1996, according to new state tax records obtained by The Times. Not only are there more million-plus earners, but the Californians in that cushy category were getting richer, with their average income rising from $2.64 million to $3.14 million.
“It really was amazing to us,” said Ted Gibson, chief economist at the state Department of Finance, recalling his staff’s first reaction to the trend.
Stock options, capital gains from Wall Street and a boom in the high-tech, entertainment and biotech industries are fueling the income climb, he and other experts said.
“As the economy in California has moved out of recession, it’s been pulling everybody along. And at the high-income levels, a lot of people are getting rich very fast,” said an analyst at the Franchise Tax Board who asked not to be identified.
The number of tax filers with adjusted gross incomes in the $1 million-plus category rose from about 9,000 in 1994 to 15,000 in 1996. (In general, adjusted gross income includes all income minus certain business expenses and money put aside in tax-deferred retirement and medical plans.)
The tax reports, compiled this spring, also show a 32% increase, to 777,000, in the ranks of Californians reporting incomes of between $100,000 and $1 million since 1994. In addition, there was a modest rise among households that had been below $20,000.
Although figures for 1997 and early 1998 are not yet available, a gush of extra tax revenues signals that the strong upward trend for the wealthy continued. Financial planners trying to invest the new gains and high-end real estate brokers agree that times have rarely been better for the very top slice of society.
“It’s not surprising to me,” Santa Monica-based financial planner Brent Kessler said of the tax figures. He recalled three clients, all in their 30s and 40s, who became millionaires when their small entertainment-related companies were bought out by larger corporations in recent years. One woman received $8 million and she previously “never made over $100,000 in her life,” said Kessler, president of Abacus Financial Planning.
Similarly, Jack Blankinship, a financial advisor in San Diego County, is now working with a 50-year-old businessman who plans to retire soon from his $200,000-a-year position at a pharmaceutical firm. The lure: about $5 million in stock option gains he will exercise soon.
“We’ve seen quite a lot of that,” Blankinship said. People whose wealth jumps up so, he said, “now want to make the best of it.”
Software profits and stock options are driving the real estate market wild in Silicon Valley, and entertainment industry gains are driving up Westside house prices in Los Angeles, realty executives report.
Families suddenly made rich with stock-option funds “don’t mind paying well over the asking price of houses because they never counted on receiving that money. So it’s not costing them a lot in the minds,” said Alain Pinel, senior vice president in Northern California for Coldwell Banker.
However, the real test of the strength of the economy will be how much middle- and lower-income households are helped, said Stephen Levy, director of the Palo Alto-based Center for the Continuing Study of the California Economy. “What’s important,” he said, “is how the bulk of ordinary people are doing, not whether these few families are doing really, really well.”
The $1-million-plus tax return filer constituted a mere one-tenth of 1% of the 12.17 million tax returns in 1996. The vast majority of Californians--about 93%--reported adjusted incomes below $100,000. About a third of all the households, by far the biggest group, were in the $20,000 to $50,000 range.
Still, Californians of more modest incomes are doing better, although their gains are far less dramatic than those at the top tiers. The numbers of tax filers with reported annual incomes below $20,000 dropped 3.2% in 1996, while the ranks of those between $20,000 and $100,000 increased 2.4%.
“It has a lot to do with the mix of industries that are growing,” said finance department economist Gibson. “The industry mix in California is pretty rich.”
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More Millionaires
About 12.17 million Californians filed state income tax returns for 1996. While the numbers of the wealthiest grew significantly, 93% of state residents reported adjusted gross incomes of less than $100,000.
1996 INCOME BREAKDOWN
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Income % of total % change ‘94-96 Negative to zero 1.0% --27% $1 to $10,000 20.8% +2% $10,000 to $20,000 20.3% --0.4% $20,000 to $50,000 33.8% --0.02% $50,000 to $100,000 17.6% +2% $100,000 to $200,000 5.0% +32% $200,000 to $500,000 1.2% +32% $500,000 to $1 million 0.2% +44% $1 million and over 0.1% +66%
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Note: Some low-income taxpayers not eligible for a refund did not have to file.
Source: California Franchise Tax Board
