Californians are panicking over President Donald Trump’s tax cut plan.
They have a reason to be worried: One of the central features of the plan is that taxpayers will have to choose between a property tax deduction or a state and local tax deduction, with a $10,000 limit in either case.
In a state with a top marginal tax rate of 13.3 percent, which kicks in at $1 million, that’s a massive hit – it could mean paying well in excess of 50 percent of marginal income. Overall, California was by far the lead recipient of state and local tax deductions in 2014, with residents filing for more than $101 billion in such deductions; the second-place finisher, New York, clocked in at just $68 billion. Furthermore, the Trump tax plan would cap mortgage loan deductions at $750,000, which in an inflated real estate market like California, smacks a serious number of homeowners.
Now, the Trump tax plan would help major businesses located in California – it lowers the corporate tax rate to 21 percent, benefiting Silicon Valley and Hollywood and the myriad other Fortune 500 companies located here. But those benefits accrue to companies across the country; the costs of removing state and local tax deductions accrue mostly to blue states.
Democrats complain that this is deeply unfair. “I don’t believe California should suffer in order for President Trump to give tax cuts to the rich,” says U.S. Sen. Dianne Feinstein.
This neglects a rather crucial fact: The people who will get smacked the hardest in California are the rich. Homeowners get hit harder than renters; middle income Californians get off easy compared to those at the top end.
And what’s more, if you’re a devotee of Democratic logic, by which taxpayers receiving more of their money back amounts to a “loss of tax revenue,” California hasn’t been paying its fair share: We’ve been sucking money out of federal coffers to pay for our bloated bureaucracy and overstuffed pension programs.
California’s federal and state politicians have never had to own their tax increases – they can always count on federal tax deductions to help them cover for their high-tax policies. Every time they raise taxes, they know that those taxes will be deductible against the federal income tax. This is common practice in California.
It’s easy for politicians like Feinstein to get away with voting for higher federal taxes when they know you can deduct your state and local taxes; it’s easy for Gov. Jerry Brown to raise state taxes when he knows you can deduct your state and local taxes from your federal taxes. Limiting the SALT deduction encourages political transparency, and political accountability.
What about the argument that California already pays more than its fair share? According to the California Legislative Analyst’s Office, we receive $0.99 in federal money for every dollar we pay into the federal government; according to the Tax Foundation, we get back only $0.78 for every dollar we pay in.
But even these statistics are skewed. California has a lot of high-income earners – and they aren’t getting out what they paid in. And most of California’s costs are going to come home to roost in the future. We have massive unfunded liabilities, particularly our pension funds. Both CalPERS and CalSTRS only fund about 64 percent of projected returns, according to Pew Charitable Trusts. That means we either have a heavy state tax increase in our future, or a heavy federal tax bailout.
The federal tax system shouldn’t be in the business of preferring certain states over other states. The state and local tax deduction was doing just that. I’ll be paying significantly more in taxes next year if the Republican bill passes. But that’s not because of Republicans. That’s because Democrats in both the federal and state governments have been passing the buck for years for their own overspending and overtaxation.
Now that cost will come home to roost, as it should, with the people who pushed tax increases without paying a political penalty.
Ben Shapiro is a Los Angeles-based political columnist and editor-in-chief at The Daily Wire, a conservative news and opinion web site. He can be reached at @BenShapiro.