California Skirting the Issue on Tax Reform (Again)

The state of California is working on a proposal to mitigate effects of tax reform, but they're missing the mark.

With tax reform being passed at the federal level, several states will be feeling the effects of changes in the tax code. Most notably, states with very high taxes, like Maryland, New York, and California, have complained that the reduction of the local and state deduction will seriously hurt their residents. They're are right, but the solutions they’re proposing are far from what is needed for true relief.

As discussed before by readers of TPOH, Maryland will be altering its tax code to offer relief for its residents. The state’s tax code is tied directly to the federal code, so any change at the federal level causes direct effects on residents. The state may take in an extra $750 million due to the tax change, but the governor wants to change the tax code to ensure that residents keep that money.

California is also figuring out how to deal with the effects of the tax reform package, and legislators are putting together a change to their state’s tax code to attempt to provide relief. The problem is that the changes are not going to be reductions in tax rates; rather, it will merely be word games and semantics.

According to Mercury News, if State Senate Leader Kevin de León gets his way, residents will be able to make “donations” to the state to circumvent the $10,000 cap on local and state tax deductions.

Senate leader Kevin de León on Thursday introduced legislation to allow Californians to make a charitable donation to the state — to the California Excellence Fund — in exchange for a dollar-for-dollar state tax credit. In other words, people would be able to donate to the state instead of paying taxes. The new tax law Congress passed last month does not place a cap on deductions for charitable giving.

“The Republican tax plan gives corporations and hedge-fund managers a trillion-dollar tax cut and expects California taxpayers to foot the bill,” he said in a statement. “We won’t allow California residents to be the casualty of this disastrous tax scheme.”

Californians are especially prone to feeling the effects of the tax reform bill. In 2015, residents averaged $22,000 in state and local deductions. That will now be halved going forward.

So what’s their solution? Claiming that “donations” to the state are a form of charitable giving. There are currently no limits on deductions for charitable giving.

While some accountants have questioned whether the IRS would accept such deductions as true charitable donations, UCLA law professor Kirk Stark — who is advising the lawmakers — notes that California and many other states already offer taxpayers a similar deal: Donate conservation easements or money for private school vouchers and receive a state tax credit along with a federal tax deduction for the charitable contribution.

It’s a wonderful attempt to shield Californians not from their taxes, but from reality. California is a state that just cannot find enough things to tax, and sees no limits on what it may take from what its residents produce. The truth is that if Californians realize just how much of their money is being taken by the state and local governments, there would be massive outrage.

These legislators claim that the new tax package is one of the worst things every created. They claim that reducing the local and state deduction is basically akin to these high tax states bailing out states with lower tax rates (the governor of New York even called the tax bill illegal and unconstitutional!). However, the opposite is actually true.

For years, all the other states have been subsidizing the high tax states because of the state and local deduction. Taxes taken by the federal government from someone in Texas or Tennessee were actually subsidizing those in California.

The politicians are completely skirting the issue here: state and local taxes are too high, plain and simple. People are fleeing the state in no small part due to the amount of money that the government extracts from their earnings.

No amount of word games with “donations” to the state is going to fix that problem. If California really wants to relieve its residents from the effects of the new federal tax code, it will have to reduce its own taxes and spending so that residents can lively happily with more of their wages.

This country was founded on the ideals of being able to keep what we earn, not having to fork over the majority of our wages to the government. As the first Supreme Court Chief Justice John Marshall stated in McCulloch vs. Maryland, “The power to tax is the power to destroy.”

Indeed, these high tax states are using that power and are destroying themselves. For more on that, check out how their residents are responding here. Will the politicians in these states learn that actions have consequences?

What do you think of this proposal? Let me know below!