The tax bill signed into law by President Donald Trump last week caps the federal deduction for state and local taxes and requires California’s most productive citizens to pay much more to Uncle Sam. Unless, that is, California changes its system of taxation, something I’m advocating.
At the 37 percent marginal tax rate, Californians could be paying billions more in federal taxes for the privilege of living in California. Many of these high-income earners who currently pay most of our state’s bills will simply throw in the towel and move to a state with no income tax, and, in many cases, take their businesses and jobs with them.
And yes, there are states that not only survive without an income tax, but thrive. Florida, Washington, Texas, Nevada, Wyoming, South Dakota and Alaska all recognized that income taxes fluctuate too much as the economy expands and falls into recessions, causing boom and bust cycles in government funding.
They have chosen different ways to fund such government services as public safety, education, fire control, health care and the hundreds of other tasks. Florida gives tourists the privilege of supporting their state budget. Nevada and Texas tax gambling and oil extraction, respectively.
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So what could California do to avoid driving so many businesses, jobs and taxpayers to other states? The answer is complicated. California’s historic Proposition 13 is politically untouchable, since it offers its greatest protections to people who own homes, including many senior citizens.
Our sales taxes already are among the highest in the nation. We’ve just jacked up vehicle license fees and fuel taxes. Some states have looked at extending sales taxes to services in exchange for eliminating income taxes, a notion that makes many taxpayers wary.
Others have looked at transaction fees, but those too engender fear among taxpayers that they'll end up paying more. Yet clearly we need a response to the new federal cap on state and local tax deductions, or California will be sending tens of billions of dollars more annually to Washington D.C.
Remember, California is already a donor state, sending more tax dollars to D.C. than we receive in federal funding.
Our politicians seem more interested in arguing over whether Washington’s tax reform is good or bad, when they should be crafting a strategic redesign of our state’s tax structure. If there was ever a need for a bipartisan solution to protect all of us, Republicans, Democrats and Independents, this is surely it.
The reason our politicians posture instead of act is because too many of them are beholden to special interest lobbyists who treat the California tax code as their personal playground, carving out exemptions, subsidies and gifts of corporate welfare to campaign donors.
I would like to see the income tax significantly reduced, along with matching reductions in spending. That is unlikely to happen with huge Democrat majorities in the Legislature and existing statutory obligations. Those majorities are part of the status quo, a system rife with special interest corruption where money talks and principles walk.
It’s equally unlikely that the majority party will address the very real problem which California's extremely high income tax has now become under the new federal tax law. Should they choose to prove me wrong (and I hope they do), there are several essential elements to any successful reform.
First, it must be revenue neutral, meaning politicians would have to refrain from using it as a vehicle to simply raise taxes overall. That doesn’t mean Democrats won’t propose new taxes in the future, or that Republicans won’t oppose them. It simply means that we have to separate those future battles from this one-time reset of our tax structure.
Secondly, they must study the successful strategies employed by other states that get along quite nicely without a state income tax. These states recognize that a tax on income – particularly one as onerous as California’s – is an open invitation for productive businesses and individuals to move elsewhere.
Every state is different, and none of these other state systems will prove to be a template for California. But we need to recognize the present reality that under the federal tax reform, California’s highest in the nation income taxes are a dinosaur that need to be reformed. California needs to stop being Washington D.C.’s cash cow.
John Cox is a Republican candidate for governor, John@JohnCoxForGovernor.com.