This tax break cap can cost you money in Sacramento. And it isn’t changing anytime soon
Deducting state and local taxes from federal returns is highly popular in the Sacramento area — but for at least another year, those deductions are going to be limited.
The Republican-authored 2017 tax cut law capped the deduction at $10,000 per return. Twenty-one of the hardest hit districts were in California, according to an analysis by the nonpartisan Tax Policy Center.
“The states affected are generally blue. They were singled out,” said Frank Sammartino, Tax Policy Center senior fellow.
A study by the Federal Reserve Bank of Atlanta earlier this year found that the 10 places gaining the least from the income tax cuts are all Democratic-leaning. California topped the list, which also included Vermont, Oregon, Washington, D.C., Hawaii, New York, Massachusetts, Minnesota, New Jersey and Maine.
The 15 most affected congressional districts, and 78 of the top 100, have Democratic members of Congress.
The Democratic-run House last month tried to ease the pain, passing legislation to eventually do away with that cap. Four area Democrats — Reps. John Garamendi, Mike Thompson, Doris Matsui and Ami Bera — supported the bill. Republican Tom McClintock opposed it.
The bill’s progress has since stalled. Asked if he would consider the ideas in the House bill, Sen. Charles Grassley, an Iowa Republican who heads the tax-writing Senate Finance Committee, said flatly: ”No.”
“The economic answer is this tax bill has been so good for the economy that we should not be bringing uncertainty about the tax bill by even talking about it,” he told reporters last week.
When the cap limit was proposed as part of House legislation in 2017, McClintock was one of 13 Republicans to vote against the bill. A few weeks later, he became the only Republican to switch, voting for a revised version that included the limit.
He explained before that second vote that he opposed the first bill “because the loss of broad-based deductions like state and local taxes would have caused significant tax increases on many of my middle-class constituents in the high-tax, high-cost state of California.”
But the new version had improvements that he found acceptable. “The lower tax rates in this bill now more than compensate in almost every case for the remaining limits on state and local tax and mortgage interest deductions,” McClintock said. “Even taxpayers who lose tens of thousands of dollars of deductions will still pay lower taxes than they do today.”
Republicans wrote the 2017 tax bill that put limits on the deduction, and got no Democratic support. As McClintock did, GOP lawmakers argued that capping the deduction would be offset by other tax breaks, notably a reduction in rates.
Grassley said Wednesday that while the bill did not target Democratic states, it did address higher-tax states.
“From a political standpoint, our goal was to make sure that the national taxpayers weren’t subsidizing the big spending in a lot of mostly liberal states,” he said.
Without naming such states, he called them ”big population states where they don’t care a whole lot about what they spend or what they tax the higher-income people.”
Putting limits on state and local tax deductions is a way of limiting state and local taxation because it helps “help ensure federal tax policy doesn’t reward states and cities for raising their taxes sky high,” said Rep. Adrian Smith, R-Nebraska, a member of the tax-writing House Ways and Means Committee.
Data show that most people generally are paying less federal income tax because of the 2017 legislation. But in many places where the bigger state and local deduction was unavailable, the tax cut was often less than in other congressional districts.
Among them is the 4th District, west of Sacramento, where 45.3% of 2016 returns had an average deduction of $14,286, according to the center’s analysis.
Also in the top 100: The 7th District. The southern and eastern Sacramento county district had 39% of returns taking the deduction in 2016, averaging $12,081. In the 5th District, east of Sacramento, 37.3% took an average deduction of $14,157.
People in the Sacramento-based 6th District used the break on 28.1% of returns and took an average deduction of $10,019. The 3rd District, north and west of Sacramento, had the deduction on 33.5% of returns. Average was $11,577..
The House bill would have closed the gap. It doubled the deduction for married couples this year, and then removed the cap entirely for 2021 and 2022. It would have raised the top tax rate from the current 37% to 39.6%. The bill passed 218 to 206 on a largely party-line vote.
But it’s unlikely anything will be done now to change the current system. Democrats’ best hope is that the cap becomes a big campaign issue, and they plan to push it hard.
Rep. Anna Eshoo, D-California, put the campaign pitch starkly: “It was an assault on the middle class.”
This story was originally published January 13, 2020 at 5:00 AM.
.jpg)