The holiday season is behind us, but California’s Senate Democrats are eager for the state’s residents to stay in a charitable—albeit compulsorily charitable — mood.
As the state Legislature returns to session, the majority party feels the need to respond quickly to a crucial plank of the recently enacted federal tax reform legislation. In addition to doubling the standard deduction, the bill caps at $10,000 the itemized deductions taxpayers can take for state and local taxes — known as “SALT” deductions — upon which many mostly upper-income Californians rely.
As residents of the Golden State know well, state and local tax bills annually send residents into an April depression. The average itemized SALT deduction in California was more than double the new $10,000 cap. According to the Tax Foundation, Californians used SALT deductions to save more than $100 billion on their obligations to the IRS in 2014. For some, elimination of the deductions could erase some of the bill’s rate cut benefits, although with the standard deduction being doubled, far fewer taxpayers would be likely to itemize at all (only about one-third of taxpayers itemize currently).
California Senate President Pro Tempore Kevin de Leon, who wants to find a new home in the U.S. Senate, thinks he’s found a loophole that will allow Californians to have their cake and eat it too. His plan is to allow residents to “donate” to “a special fund” the no-longer deductible portion of what they owe to the state — that is, any amount over $10,000. They would then be able to write off that amount as a charitable deduction.
According to IRS guidance, states actually do qualify as organizations to which individuals can make charitable contributions for purposes of a federal income tax deduction. Be that as it may, it’s not clear that a compulsory contribution is, in fact, “charity,” since the very concept requires the act to be voluntary.
That’s the crux of the problem with de Leon’s proposal. Even if it gives payers another way to discharge their responsibilities to the state, the obligation would remain nonnegotiable. And it’s not likely that the IRS would look kindly on these sorts of shenanigans.
Now, other sly moves, like reallocating the state’s tax burden from income taxes to employer payroll taxes — which remain deductible — may prove more practical, if less politically popular. But short of making state tax obligations legitimately voluntary, the fact remains that the most straightforward way for California to ensure that residents get the full benefits of tax reform is for the state to reduce its tax rates outright.
With a top marginal rate of 13.3 percent, the state’s income taxes are already the highest in the nation, and they are steeply progressive, to boot. Even middle-income earners feel a pinch relative to their peers in other blue states. This has led to some people seeking far worse climates just to enjoy better tax treatment. Between 2004 and 2013, roughly five million people left California, while the state was only able to attract 3.9 million — a net loss of more than one million residents.
Even if state policymakers don’t put much stock in the supply-side wisdom of lowering marginal rates, surely they can understand the significance of pushing out portions of the population who have become increasingly indispensable to California’s long-term fiscal health.
Until they do, Californians are left with the likes of de Leon’s gambit. The proposal, sure to be popular among legislators in Sacramento, will ultimately amount to little. It will only delay the policy reckoning to come. In the meantime, more will flee to states with worse weather and more freedom.