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California dodged a big financial bullet when congressional Republicans deadlocked on overhauling or repealing the Affordable Care Act.
The state had vigorously embraced the ACA, or Obamacare, and reduced its medically uninsured population by millions of persons, mostly via expansion of Medi-Cal, the state’s program for the poor, with billions of federal dollars.
Had the ACA repeal occurred, the state would be forced to either drop those additional Medi-Cal enrollees or cough up many billions of dollars each year for their care.
However, the demise of the repeal effort triggered another major drive in Congress to overhaul the federal tax system, and it, too, could have a heavy impact on California.
Unlike the Obamacare repeal, though, federal tax reform would not affect the poorest Californians, but rather the most affluent.
Republican tax reformers want to eliminate the long-standing federal deduction for state and local taxes, known by the acronym of SALT, and use the extra revenues it would generate for overall reductions in tax rates.
Nationally, SALT deductions total more than $500 billion a year, and they are, not surprisingly, weighted heavily toward states with the highest levels of state and local taxes, particularly income and property taxes, such as California.
Roughly a third of Californians’ federal tax returns claim the deductions, and they total about $100 billion or a fifth of the nation’s overall total, saving Californians about $20 billion a year in federal taxes.
A recent study by the Government Finance Officers Association that breaks down SALT deductions by congressional district shows several in California that average more than $10,000, topped by $18,239 in the 18th Congressional District, centered on the very affluent San Francisco Peninsula.
The 18th CD is represented by Democrat Anna Eshoo, which is generally true of those with especially high levels of SALT deductions. In other words, high-income taxpayers who would be hit hardest by eliminating SALT deductions would mostly be in Democratic districts.
Conversely, California’s Republican members of Congress, including GOP majority leader Kevin McCarthy of Bakersfield, mostly represent lower-income Californians who would feel lesser impacts. McCarthy’s taxpayers average just $2,929 in SALT deductions.
Clearly, one unspoken political motive behind the drive to end SALT deductions is punishing blue states, such as California, which have high state and local tax burdens.
Beyond the impact on individual taxpayers, however, eliminating SALT could also affect state government revenues. It would make California’s high-income taxpayers feel the full impact of recent increases in their state income taxes, and thus fuel any inclinations they may have to shift their official residences to Nevada or some other low- or no-income tax state.
Likewise, eliminating the deduction for property taxes could make it more difficult for local governments and school districts to persuade their homeowning voters to borrow money through bond issues, which require property tax increases to repay.
The prospect of a SALT repeal is disconcerting to California’s Democratic politicians for both micro and macro reasons but they are being fairly quiet about it, because opposing it would be defending the rich, and that runs counter to the current left/populist shift in state party politics.
The situation drips with sociopolitical irony.