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California is a deep blue state and one manifestation of its left-leaning politics is a very high level of taxation, particularly levies on personal income.
The state has the nation’s highest income tax rates, topping out at 13.3 percent of taxable income, and depends on those taxes for 70 percent of its general fund budget.
Last week, the state Department of Finance reported that through the first nine months of the 2017-18 fiscal year, state revenues were topping estimates by $3.3 billion, with two-thirds of the windfall from income taxes.
Moreover, half of those income taxes are paid by the top 1 percent of taxpayers, about 150,000 returns in a state of nearly 40 million people.
Hitting those at the top of the income ladder is very popular in California, as demonstrated by those numbers and by several successful tax-the-rich ballot measures. So in theory, California and its politicians should be happy with the federal tax overhaul passed by a Republican Congress and signed by President Donald Trump.
The new federal system’s most controversial aspect is a $10,000 limitation on deductibility of state and local taxes, dubbed SALT, and those in the upper income brackets will feel the pinch on their itemized deductions while those in lower brackets will benefit by more generous standard deductions.
A new study by the California Franchise Tax Board – the state’s primary tax collection agency – reveals that the SALT deduction limit will cost Californians an estimated $12 billion a year in higher payments to Uncle Sam beginning this year. Three-fourths or $9 billion will fall on Californians with incomes of $1 million or more, the FTB calculates, with the other $3 billion coming from those with taxable incomes of $100,000 to $999,999.
Conversely, the expanded standard deduction will generate lower federal tax bills for most other California taxpayers.
Overall, therefore, the federal system becomes more “progressive,” as tax mavens term it, in California because the rich will pay more and lower-income folks will pay less – right in line with what liberal Californians profess.
So why are California’s Democratic politicians complaining that the federal tax overhaul is a slap at this and other high-tax states?
It’s really quite simple. If the wealthiest Californians can no longer write off their big state income tax and local property tax payments on their federal returns, they will feel the full impact of those taxes and may be motivated to flee the state for lower-taxing states, taking their high taxable incomes with them.
Gov. Jerry Brown and a few other state politicians have been upfront in their concern about a potential exodus of the taxpaying rich to other states, some of which have no state income taxes, such as neighboring Nevada, Texas and Florida.
There were anecdotal accounts of such relocations following a 2016 ballot measure that made higher income tax rates semi-permanent – hitting the wealthy for about $6 billion a year. But the real test may come a year from now, when Californians must file their federal returns without being able to fully deduct their state and local taxes and must write bigger checks to make up the difference – a difference now pegged at $12 billion.
Washington’s Republicans may have wanted to punish California, New York and other high-tax blue states – rubbing SALT in their political wounds, so to speak, from being on the losing side of the 2016 presidential race. But it’s disingenuous for California’s politicians to complain when the feds are merely following their lead of piling more taxes on those at the top of the societal heap.