California Forum

The rich are fleeing California. Flatter, lower taxes will bring them back

President Donald Trump displays his $1.5 trillion tax overhaul package in the Oval Office. Though wealthy taxpayers cheered it, it has cost well-off Californians because it slashed a previously lucrative deduction for state and local taxes.
President Donald Trump displays his $1.5 trillion tax overhaul package in the Oval Office. Though wealthy taxpayers cheered it, it has cost well-off Californians because it slashed a previously lucrative deduction for state and local taxes. AP

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It seems eons ago that California progressives were predicting the end of Western Civilization if Congress passed the Republican tax reform bill. Similar to the predictions of doom advanced for another earth-shattering tax reform measure – Proposition 13 in 1978 – liberals just don’t understand that when families have more to spend, good things happen with the economy.

Nonetheless, there is one feature of the tax reform package that raises a legitimate concern for Californians, which is the loss of the SALT (state and local tax) deduction. Because California has the highest income tax rates in America, one of the few advantages for those with wealth has been the ability to deduct state taxes on one’s federal return. But the tax reform package significantly reduced that advantage. As a result, the federal tax reform legislation means higher taxes for many wealthy Californians as well as the wealthy in other blue states that impose heavy tax burdens.

In the months since tax reform was enacted, the national economy has boomed. The Atlanta Federal Reserve even predicted GDP growth in excess of 4 percent, which is truly astounding. In California, economic expansion has created a huge budget surplus, but nothing at the national level can help with one of the Golden State’s biggest tax problems – extreme revenue volatility.

In a rational world, California policy leaders would take the opportunity now to restructure our tax system by flattening out our income tax rates. A flat tax would probably make most Democrat legislators gag, but even if we retained some degree of progressivity, there is little reason to maintain the stratospheric rates that are rendering California uncompetitive.

Sacramento Mayor Darrell Steinberg speaks on Thursday, June 7, 2018. about a proposal to raise city's sales tax one cent.

But this is California, not the rational world. The tax-and-spend lobby’s answer to federal tax reform has been to propose a convoluted scheme that would allow high-wealth individuals to make “contributions” to some government-affiliated entities that they argue would be deductible as charitable giving.

Good luck. The IRS has recently issued a “go ahead, make my day” memo to all the states that are considering this ploy and, as a taxpayer advocates, we can say with no equivocation whatsoever that it is best not to mess with the IRS.

In the meantime, we continue to experience the negative consequences of California’s tax code. The loss of the SALT deduction will be just one more incentive for well-off Californians to move out-of-state. Capital flight is a real problem, it is measurable and not just anecdotal. (Another word for a multitude of anecdotes is data).

California’s dysfunctional tax code is partially responsible for the state’s ever shrinking middle class. This makes the idea of expanding the sales tax to services even more questionable as the sales tax is highly regressive. This problem could conceivably be alleviated by lowering the overall rate, but the idea of lowering taxes makes Democrats recoil like vampires exposed to light.

Make no mistake. California remains a wonderful state with innumerable virtues. But our public policy decisions impede the state from achieving all that it could be. That is especially true with the manner in which we tax our citizens and businesses.

Jon Coupal is president of the Howard Jarvis Taxpayers Association, and a participant in The Sacramento Bee/McClatchy “Influencers” series on public policy, politics and the government. Reach him at jon@hjta.org and find the series (with more to come Monday on tax policy) at sacbee.com/influencers.

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