As President Donald Trump and congressional Republicans congratulate themselves for passing their corporate tax cut bill, California policy experts are left to contemplate ways to ease the pain for working California families.
It won’t be simple. But state lawmakers’ first reaction should not be to seek to raise state taxes on the same corporations that stand to gain under the new revision of the federal tax code, tempting though that might be.
Corporations will do well under the new tax bill, as The Sacramento Bee’s Dale Kasler writes. The corporate tax rate will fall from 35 percent to 21 percent. The bill also bestows breaks on businesses that purchase equipment, a boon for California-based companies that produce software, robotics, and high-end medical devices.
So it comes as no surprise that the Silicon Valley Leadership Group and Bay Area Council issued a letter lauding the parts of the tax bill intended to help businesses. Still, as that letter noted, professionals who earn good money but are not rich by California standards will take it on the chin.
For example, heaven help married Californians. The new tax bill includes a marriage penalty by capping at $10,000 the amount of state income and local property taxes that filers can deduct from their federal taxes.
People wed for love, not money, but say you’re an unmarried couple and earn a combined $150,000. Each partner would file separate income tax returns and claim $10,000 each in state and local tax deductions, $20,000 in total. Good for them.
Say you’re a married couple with a couple of kids and a mortgage, earning that same $150,000. You’re making ends meet but not eating at fancy restaurants. Under the tax bill, married couples will be able to deduct no more than $10,000 in state income and local property taxes, half of what an unmarried couple could claim.
It’s one of many ways that Trump’s tax bill, the one that 12 of 14 California House Republicans supported, will harm Californians in the middle.
State policy makers ought to find ways to help ease the pain. There already are calls to reduce or abolish California’s income tax, which generates nearly two-thirds of the state’s general tax revenue, and replace it with alternatives, such as taxes on services. Targeted taxes on services used by wealthier people and businesses would be an alternative.
However, more than 63 percent of the voters last year approved Proposition 55, which added upper income tax brackets to the state Constitution. To unravel Proposition 55, voters would need to repeal taxes on wealthy people. Good luck selling that to the electorate at a time when the gap between the rich and poor is widening.
Trump has compared the bill passed this week to the major 1986 tax overhaul approved when Ronald Reagan was president. He is ignoring history. The 1986 bill was two years in the making, and won bipartisan support.
The bill passed this week was rammed through the process in seven weeks, and received no Democratic support. Under the 1986 bill, rich people ended up paying more, not less, as will be the case with the bill approved on Wednesday.
Perhaps if they had engaged, Democrats could have helped shape the bill in ways that would not have been quite so detrimental to working Californians. But these are partisan times. Republicans control all branches of government in Washington, and drafted a bill that protects their constituents at the expense of blue state residents.
Experts still have not sifted through the entire 500-page bill, nor fully grasped its ramifications. But the outlines are clear. Workers in California will pay more, and corporations and people living in low cost states will pay less (though only for a few years). And so the battle lines become even sharper in Election 2018.