Sacramento, not D.C., is responsible for California’s unaffordable tax burden
Last fall, Democratic congressional candidates successfully painted the 2017 federal Tax Cuts and Jobs Act as a tax increase on hard working Californians to pick-up even more congressional seats.
Congress, they charged, raised the tax burden of many Californians by, among other things, capping the State and Local Tax, or SALT, deduction at $10,000. It is argued that Democrats gained 7 congressional seats in California in part based on this issue.
Was this a fair charge? Did Congress raise taxes on Californians in the 2017 tax reform law?
A new Pacific Research Institute study found that, in fact, Congress lowered taxes for millions of hard-working Californians. It’s big spending state-lawmakers who raised taxes on Californians.
Millions of Americans in every state benefited from the Tax Cuts and Jobs Act with a reduced tax burden. Looking at the impact of the Act on married couples filing jointly in five tax brackets ($50,000, $100,000, $200,000, $500,000, $1.5 million), average tax rates declined for low, middle, and upper-income taxpayers. Only taxpayers in the super-rich highest tax bracket paid more.
Many California taxpayers benefited less from the 2017 tax reform than taxpayers in other states with the same income. Comparing the tax burdens on taxpayers in the $200,000 tax bracket in California and Indiana shows that these Californians saw their average tax burdens decline by 10.3 percent and their marginal tax bracket decline by 4 percent, while Indianans (an example of low-tax state) saw their tax rates drop by 13.4% and 12.5% respectively.
Why did taxes fall more in Indiana than in California? Because of the capping of the SALT deduction.
The SALT deduction allows taxpayers to deduct their state and local tax burden from their federal income taxes. While this was a great savings for many Californians, it effectively forced taxpayers in low-tax states like Indiana to subsidize the expensive tax burden in high tax states like California.
Under the old SALT deduction, Californians didn’t truly appreciate just how much they were paying in taxes to Sacramento each year because they could deduct these higher taxes. In 2016 alone, Californians deducted over $82 billion in state and local income taxes from their federal tax liabilities.
You can think of the SALT deduction cap as shifting billions of dollars away from special-interest tax breaks and toward broad-based, tax relief for millions of Americans.
Californians are right to be upset about the SALT deduction cap, but their anger is trained at the wrong place. They should not be upset with Washington, who lowered the tax burden for most Californians. Instead, they should be upset with their state lawmakers.
Over the years, tax and spend politicians in Sacramento have enacted unsustainable state budgets and have run up an expensive and ever-increasing tax burden on all Californians to pay for their spending wish list. Now that the federal deduction has been capped, Californians are truly experiencing Sacramento’s tax-and-spend budget pain for the first time.
Not surprisingly, supporters of Sacramento’s big spending are trying to quickly change the subject. Their allies in Congress have introduced several measures this session to either raise or repeal the SALT deduction cap. This would be a mistake.
Rather than taking America backwards and restoring a special-interest tax break to fuel more runaway state spending, Californians should instead demand reform from Sacramento. In an ideal world, this would mean California transitioning to a flatter, simpler tax system that would lower the tax burden for all Golden State residents and serve as a check on big government spending.
This would be a win-win for Californians – a lower federal tax burden coupled with state tax reform that gives Californians relief from Sacramento’s high taxes and high spending.
Dr. Wayne Winegarden is a senior fellow in business and economics at the Pacific Research Institute. Download a copy of the new study “Making it Rain in California” at www.pacificresearch.org.