Thursday, January 30, 2014

Back Home Again In Indiana

Anyone who has known me for long, knows I'm originally from Indiana, and that I've said I'd never go back.  I made Coastal San Diego my home 9 years ago, and have loved almost every minute of it.  Originally, I moved to California to attend school.  Though I didn't know what school, or even what part of California.  All I knew was that the state would subsidize my education - something Indiana was unwilling to do.  I applied for a few jobs, and was quickly hired sight-unseen by an online retailer, in a sleepy surf town, to update and maintain their website.  At the time, I had never even been to San Diego.  I had only visited California once on a business trip, and drove my rental car from LA down the coast.  I was probably 19, but that sealed the deal.  For me, Venice Beach may as well have been Venice, Italy.

By now, most of my friends have heard the story about how I got hired over the phone on a Wednesday, and was asked to be at work, 2000 miles away, on Monday.  The fact that I actually said yes probably went a long way in getting hired.  I packed my up my twenty year old, Toyota Corolla (that didn't have reverse), and arrived on Sunday night.  People told me I was crazy for driving that far without reverse.  I just laughed and said if they need reverse on the freeway, then they had bigger problems than me.  Over the last 32 years, people have told me I'm crazy for a number of reasons.  Only a handful were right.  I just figured they had their reasons keeping them from doing what I was doing.  On Monday, during my lunch break, I walked two blocks up to a bluff overlooking the ocean.  I'll never forget standing against the railing in that little park, not even being able to form a thought.  I had been in California for less than 24 hours, but I knew I was home.  I swore to myself and everyone I knew that I'd camp under a bridge before I'd go back, with my tail between my legs.

After the first year, I was officially a resident, and could attend community college at a steep discount.  I think my first class cost me about $50 or $60.  When I attended classes in Indiana, I could barely afford to go...  The more I worked, the less classes I could take.  The more classes I took, the less I could work.  It was a terrible cycle.  Later, I learned of a program that would guarantee my admission to the University of California if I maintained a certain GPA and curriculum.  I did just that.  A few years later, I was accepted and finished in two years with a bachelors in economics. That was about a year ago.. 

Over the years, there were so many profound experiences that would end up shaping my life.  I learned to surf.  I finished a few triathlons.  I climbed Mt. Whitney, though it took three tries.  I visited Joshua Tree, Sequoia, King's Canyon, San Francisco, Mexico.  I spent a few days chasing after the Tour of California.  A friend and I watched the pros ache up the summits, then roar through a rainy circuit finish outside the Rose Bowl Stadium in Pasadena.  I danced all night at a desert rave, and watched the sun rise over the Mojave.  I went to a "sewer party" in the basins under a freeway, where kids setup a generator and DJ stand.  I was tired that night, and just walked around in disbelief.  The walls were covered in graffiti and lit up by a kid who had a propane tank attached to an old aluminum backpack that he'd fashioned into a flame thrower.  The entire time, the climate was amazing.  You could snowboard the mountains in the morning, and hustle a few hours home to catch some waves.  There were more opportunities than I ever could have imagined.  The amount of wealth was overwhelming.  Everyone seemed to have a company, a big idea, and a million dollar home.  I  got used to the sight of Mercedes replacing Toyotas as daily drivers.  From the front yard of my small apartment, I could see the Ferraris go by, every weekend, as they cruised the coast.  I still sigh when I see a convertible Bentley two-door, but no longer break my neck just to catch a glimpse. 

Now, after nearly a decade, I've decided to go back...  So what gives?  Change of heart?  Circumstances?  Context?  I guess a little of everything, with money playing a huge factor.  As time wore on, like those cute habits of a new lover, things became apparent and annoying.  While it was true that most people who had houses had $400-500K homes, many people didn't.  It wasn't that they were homeless, but lived in apartments with roommates or in trailers.  When most Americans think of trailer parks, they know they don't want to live in one, and certainly don't think of southern California.  However, there exists a certain charm here about living in a trailer or tiny studio by the ocean.  Rent was affordable, you could leave your beach cruiser in the front yard, maybe cycle to work, and life was good.  Many of the "trailers" had now been built on so many times, they were simply small homes, on rented land.  The whole idea of a home you own on land you don't baffled me.  I now realize many of these folks had other homes in places like Montana, Texas, or Colorado.  This was how they could have the best of both worlds.  Because it wasn't just that coastal CA homes are expensive, but that the mortgage is much more expensive than rent.  If you don't plan on upgrading to a new home after a while, the benefits of a house vs. a home started to disappear.  Of course there is always the option of going inland, but many forget - San Diego is a desert.  In the summer, the temperature will increase by 1 degree for every mile you travel inland.  I wasn't inclined to pay $250K for a "starter" home to live in Phoenix climate while paying for San Diego.  I shudder to think of the rent I payed in my 9 years on the coast.  Needless to say it would have paid for a few acres and bedrooms elsewhere in the country.  So...that is exactly what we've decided to do, even if we don't retire or send our boys to school there.

Since my wife and I own our own internet based company, there is no reason to pay the coastal tax for manufacturing space.  I tell people, if I owned a nail salon or coffee shop, it would be different.  However, as it stands, I could operate from Costa Rica!  California helped me with my education, but doesn't define my business. When combined with the logistics and costs of California incorporation, and California's staunch position on helping me stay safe, it's no longer worth it.  For the money we'll save on rent, and invest in tangible property, we can park a 5th wheel trailer next to the ocean anytime we want.  After all, California has some of the best state and national parks in the country, and the whole beach is public.  It doesn't even matter that they fill up a year in advance.  It just means we'll have to book a year in advance.  We will always have a place for California in our hearts, and California will always have a place for us. 

Now, just like when I left Indiana, and everyone told me how expensive California would be, everyone tells me how expensive California will be.  That once I leave, I will have a hard time coming back.  They forget I showed up here with a few credit hours and a couple hundred bucks. They don't realize most of our sales originate on the east and west coasts - you know, where the people seem to have all the money.  If those doubters could compare my corporate bills to their California mortgages, they'd faint.  So instead of staying, and struggling to afford a mortgage out in the dirt for the next 30 years, while paying rent on a warehouse, plus CA taxes and wages...  We're going to bail for a couple years, and build elsewhere.  This Indiana boy will be glad to repatriate that coastal money in the heartland, and build some equity.  Personally, I look forward to dropping 20% on a place where the barn is bigger than the house.  I look forward to letting my company pay me rent so I can double up on mortgage payments.  I look forward to building equity, then turning my starter home into a rental home.  But most of all, I'll be watching for the look on the doubters faces when we come back bigger and more flush than ever, as full-time tourists. 

Saturday, January 25, 2014

Obamacare and the Disincentive to Work

I suppose it was my fate to be an entrepreneur.  My grandparents owned and operated a hardware store for years, after my grandfather left the navy.  My father owned a few businesses throughout his life.  None of them made him wealthy, but a couple probably could have.  Growing up in this environment, I started my first business as a teen - designing websites.  I later moved to California and graduated from UCSD with a bachelors in economics.  During my time in college, I worked as a private tutor and began a small textile company selling directly to customers.

Over the four years I've been pushing my company, I've rarely paid myself a wage.  Sure, I've enjoyed some company perks - a used truck paid in full and free internet.  However, the benefits have been far less than I could have earned working for corporation.  My years of work have all been based on potential - potential earnings, potential deals, potential values.  Only after four years did all these potentials even begin to turn to tangibles - equipment, assets, revenues, profit.  A brand.  Perhaps it sounds like I'm complaining, but I honestly wouldn't know what to do if I wasn't busy.  I just knew that someday I could reap the rewards of hard work.  Now that the harvest season is approaching, I'm realizing many of my rewards will be accompanied by punishments.

As a small business owner, and non-student, no one is willing to "give" me insurance any longer.  There have been years that I spent without it.  My lack of coverage has never been a issue though.  Even when I was covered by my university, I only used to once for minor physical therapy relating to a car accident.  Frankly, I've been fortunate.  No catastrophes, conditions, health scares, tonsillitis, appendicitis, etc.  I've heard the horror stories about families losing everything due to hospital bills, and medical conditions.  I'd also studied the economics of healthcare in college.  I knew about the market failures and free rider problem caused by young people not buying insurance then relying on emergency care.  These free riders then increase the cost for everyone who voluntarily has insurance.  Though I knew the affordable care act would would affect me directly, I was anxious to see this gap closed.  As people around me cursed wondering "why the government is forcing me to buy something."  I sneered and wondered why they never asked "why does the government make me pay for others' healthcare" when the uninsured wander into an emergency room, where treatment cannot be refused.  I was then, and still am now, in favor of the individual mandate.

So what's my problem?  Where is the disincentive?  Well, as with many government programs, the implementation is flawed.  The government didn't simply pass a law requiring an individual mandate that would keep me out of the emergency room...  They created a program that required everyone (except those 29 and under) to have at least "Bronze" coverage.  While that doesn't sound too bad, the plan may include items which the customer does not want or need.  If it does include services the customer doesn't need, they may be included to use them anyway.  The "I paid for it, I may as well use it." mentality.  This is a different issues though.  As the program was being developed, the government quickly realized they had a problem - insurance would not actually be affordable to everyone, despite the Affordable Care Act's name.  Their solution?  Tax breaks.  Big ones. 

Now is where the disincentive comes into play...  As the coverage deadline looms, I began scouring the website to understand my options.  My wife and I have one young child, and another on the way.  She is currently covered by her employer, and I'm one of the 49 million uninsured.  I quickly entered our ages, insurance status, and annual income (middle 5 figures).  The result?  My children MAY be covered by various government programs, but for my wife and I only, the cost would be $367 a month premium with a $5,000 individual deductible, and a $10,000 family deductible.  That's   $4,400 a year, plus deductible.  If my wife or I were to get sick, in a bad way, our out of pocket expenses would be up to $9,400.  If this were a continuing condition, we'd pay that every year.  If our illness was a fluke, we'd be back to $4,400 the next year.  Those figures all assume our children are NOT covered by our plan. 

Realizing that my wife may change jobs, or that I may go back to school, I then decided to change our income down to $30,000.  Again, our children may be covered by government programs (they clearly would be for a family of 4 making $30,000).  However, things began to get interesting for my wife and I...  We were now eligible for tax credits.  Huge ones.  The government would now pay 100% of our premiums!  You may be asking yourself if we'd be willing to forgo $20,000 in income to save $4,400.  What you should be asking is if someone is willing to make an extra $20,000 only to see that income hit with a tax premium of about 22%!  That 22% is on top of the income taxes paid, that would not almost certainly be higher because they individual is making more money! 

The short answer is no.  No, we wouldn't give up $20,000 in income to save a few thousand.  But again, things get interesting.  I realized long ago that working hard for a W2 only increases your tax burden.  However, incorporating leaves you with a flat tax rate, despite your corporation's earnings.  You may even incorporate in a state that is more favorable to your businesses situation, without having to actually live in that state.  In the eyes of the government, it's not about how much money is coming in.  It's about how it arrives. So, if my revenue (income) comes to me directly, I'll be punished in the form of higher taxes, and higher insurance premiums.  However, if the revenues go to my corporation, they will be taxed at a flat rate.  My corporation does not need insurance, and is not subject to a progressive tax scheme. 

The important thing controlled by my corporation - my salary.  I may raise it very high, and even let my company take a loss.  I may decrease it and become just another member of the working poor.  The government cannot force me to take a "good" job, or to not work a crappy one - with the company I own.  At the end of the day, I still control the assets, while avoiding much of the liability.  I've long wanted to be a member of the upper class.  However, with the government making me choose between supporting them, and supporting my family, I feel it may be a very long time before I have the W2 of a CEO.