California officials breathed a sigh of relief when squabbling among Republican members of Congress stalled, perhaps permanently, the repeal of the Affordable Care Act.
Otherwise known as Obamacare, the ACA pumps more than $20 billion into California health care each year, mostly to provide coverage to several million additional Medi-Cal enrollees.
Had the ACA been repealed, the state could have faced either eventually cutting those Californians loose or coughing up billions of dollars to continue coverage.
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However, as the ACA moves to a back burner, President Donald Trump and Congress appear to be moving a tax overhaul to the front – and once again, California has a big stake in what, if anything, happens.
Many tax notions are floating around Washington, but two could have a particularly heavy impact on California because it has a relatively high number of high-income taxpayers and the state hits them harder with taxes than any other state.
One is eliminating the federal income tax deduction for state and local taxes; the other is eliminating the federal estate tax.
This year, Californians – particularly affluent Californians – will deduct at least $100 billion in state and local taxes, primarily income taxes, from their federally taxable incomes, thus saving them at least $20 billion.
Eliminating the deduction, as some Republicans propose, would give the federal government a big injection of revenue, with about a fifth of the windfall coming from California because it has the nation’s highest state income tax rates.
The offset is, in effect, a subsidy to California and other high-tax states, such as New York. However, it also should be noted that California, New York and other high-tax states are virtually all blue, strongly anti-Republican in their voting patterns.
The deduction sharply reduces the net effect of state taxes – such as the recent tax hikes on high-income Californians, and thus makes them more politically palatable.
If the deduction vanished and those taxpayers had to bear the full impact of state income taxes, some officials fear, it would entice at least some to flee to states with low or no income taxes, such as Texas, Nevada or Florida, and cut into state revenues.
Eliminating the federal estate tax, dubbed a “death tax” by critics, would have the opposite effect – reducing the federal bite on wealthy Californians by an estimated $4.5 billion a year.
Were it to happen, state Sen. Scott Wiener, D-San Francisco, wants to recapture that money for the state’s coffers. He’s introduced Senate Bill 726, which would ask voters to repeal a 1982 ballot measure that prohibits California from levying an estate tax and, if they agree, impose an inheritance tax equal to the current federal levy, 40 percent, on estates of $5.5 million or more.
Wiener says he wants the $4.5 billion revenue gain for “our schools, our healthcare system, and our roads and public transportation systems.”
If it happens, however, it would give wealthy Californians another reason to flee the state and take their taxable incomes and estates with them.