These things would all be taxed if California Democrats have their way
California households benefited the least from the income tax cuts in the 2017 tax law, according to a new report. The study, published by the Federal Reserve Bank of Atlanta, confirms the complaints from Democratic-leaning “blue” states that the Republican-backed federal tax overhaul was tilted against them.
The primary reason the report finds for the tax cuts’ different impact on households in different states: the law’s cap on state and local tax or SALT deductions, which predominantly benefited residents of high-cost, high-tax Democratic states.
The research paper, authored by economists at the Federal Reserve Bank of Atlanta and academics from University of California, Berkeley and Boston University, ranked all fifty states and the District of Columbia in terms of how much wealth local households stand to gain from the income tax cuts in the new tax law.
Their analysis found that California came in dead last in terms of the lifetime benefits the state’s households will receive from the tax law, assuming the personal income tax provisions are made permanent (under the existing law, they are set to expire in 2025).
On average, California households will enjoy a 0.9 percent increase in spending over the course of their lifetime from the tax cuts.
By way of comparison, households in Wyoming are projected to enjoy a 2.1 increase in spending potential, on average, landing the heavily Republican state first on the list. Of the states ranked in the top ten, just one, Washington, is a blue state.
Three — New Hampshire, Nevada and Florida — are considered “purple” states, where the number of Democrats and Republicans is relatively even.
All 10 of the states that gain the least from the income tax cuts are Democrat-leaning. In addition to California, they include Vermont, Oregon, Washington, D.C., Hawaii, New York, Massachusetts, Minnesota, New Jersey and Maine.
The research affirms Republicans’ defense of the tax law, underscoring the fact that the average taxpayer across the country stands to benefit financially from the federal income tax changes, which included reducing the top marginal tax rate, doubling the standard deduction and raising the threshold for the Alternative Minimum Tax.
But it also reinforces the fact that the benefits of the law are uneven, with people in some parts of the country reaping far larger windfalls than others.
That’s primarily “explained by the limitation on the SALT deduction,” the report’s authors write. To pay for the other tax cuts, the GOP authors of the 2017 law put a $10,000 cap on the amount of state and local taxes individuals can deduct on their federal income taxes, and eliminated a number of other income tax deductions.
The report finds that if the law had not capped the SALT deduction, blue state households would have gained more wealth, on average, than red state households from its passage.
The impact of the SALT cap is particularly pronounced for wealthy households.
According to California Franchise Tax Board, approximately 2.6 million taxpayers deducted more than the $10,000 limit in state and local taxes in 2015. Of that group, about 1 million will owe more in taxes in 2018 — to the tune of $12 billion. About $9 billion of that will be paid by about 43,000 Californians who make $1 million or more.
But some middle-class taxpayers are likely to pay more, too. According to tax board estimates, 751,000 California households with incomes under $250,000 will probably owe a combined $1.1 billion. And given the high cost of living in the state, $250,000 does not feel like nearly as much money as it does in other parts of the country.
The Federal Reserve Bank of Atlanta paper projects that as a result of the GOP tax law, “red-state households in the top 10 percent ... receive a 2.0 percent boost to their remaining lifetime spending compared to just 1.2 percent for blue-state top 10-percenters.”
If the tax law had not capped the SALT deduction, however, “the gains in spending would have been very similar for the top 10 percent regardless of state.”
A spokesman for Iowa Sen. Chuck Grassley, the leading Republican on the Senate Finance Committee, dismissed the idea of revisiting the SALT cap in February, providing a statement to McClatchy calling the deduction “a federal subsidy for states to raise taxes on their residents without political consequence.”