A proposal made by the Trump administration Wednesday would likely cause upper middle-class Californians who itemize their federal tax returns to pay hundreds or thousands of additional tax dollars each year.
President Donald Trump released a multi-faceted plan on Wednesday that simplifies the tax code, raises the standard deduction that households can claim and eliminates multiple itemized deductions. Some of the changes could significantly lower the tax bill of Californians.
But one particular change – the elimination of the ability to deduct state and local taxes – would hurt California more than almost any other state.
California famously has high income tax rates, particularly for the wealthy. Californians deducted the equivalent of 5.5 percent of total income in 2014. No other state except New York had a higher proportion of income deducted due to state taxes.
The average state income tax deduction claimed by Californians earning between $75,000 and $100,000 in 2014 was $4,486, according to a Bee review of IRS data. Under the current system, a California family in the 15 percent federal income bracket that deducted that much in state income taxes would reduce their federal taxes by around $700. Those savings would disappear under Trump’s plan, though their loss might be offset by other tax cuts.
In 2014, the amount Californians deducted for state income taxes was nearly three times the amount deducted for property taxes or charitable contributions and 25 percent more than the amount deducted for mortgage interest. It dwarfed the amount paid in alternative minimum tax – which insures the wealthy pay enough after deductions – by a factor of ten.
Critics of Trump’s plan to eliminate the state income tax deduction say it essentially punishes states that voted against him. States with high state income tax rates tend to vote for Democrats. Treasury secretary Steven Mnuchin says the current deduction wrongly forces the federal government to subsidize high state income taxes.
In California, eliminating the deduction would likely have little impact on the poor or the lower middle class. California’s income tax system takes the most from the wealthy. Those living in poverty often pay little or no state income taxes (but do pay a disproportionate amount of income on sales taxes). In addition, the poor often take the standard deduction rather than itemizing deductions.
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