Partial preservation of income tax deductions softens blow to Californians

Some Californians are breathing a sigh of relief now that House and Senate Republicans have agreed to a partial preservation of state and local income taxes, but a lot of taxpayers will still be unhappy.

The GOP’s tax agreement announced Wednesday, although not finalized, would allow Californians filing federal taxes to deduct up to $10,000 for state and local income taxes and property taxes combined. Previous versions that emerged out of both the House and Senate had sought to repeal the deduction except for a $10,000 cap on property tax deductions.

Such a move would have been particularly punitive for a blue state like California, which has a progressive income tax rate, taking a greater percentage from higher earners. The loss of the state and local income tax deduction would have impacted over 6 million California households—one out of every three. The new version is expected to hit far fewer households.

“It takes it from horrible to slightly less horrible,” said Assemblyman Phil Ting, D-San Francisco, chair of the Assembly Budget Committee. “For people living in California, it’s an absolute catastrophe because they can’t go deduct all their state income taxes and they may not be able to deduct all their property taxes.”

According to the state Finance Department, the average deduction for state and local income taxes alone is nearly $16,000 per return, while state and local property taxes average less than $6,000 per return.

University of California, Davis law professor Darien Shanske said Wednesday’s changes will mean somewhere between 1 to 2 million households will still be impacted since they exceed the deduction cap.

In anticipation of federal changes, California policy analysts have been mulling possible ways to outmaneuver the congressional Republicans and the Trump administration. Shanske, who co-wrote a paper on the unintended consequences of the tax plan, said California could explore some tax maneuvers to give those taxpayers ways to reduce their federal tax burden.

One example would be to offer Californians state income tax credits if they make charitable contributions to public schools and universities, because those would remain deductible under the GOP plan.

Assemblyman Phil Ting, D-San Francisco

 Another complicated idea involves shifting an employee’s income tax burden to the employer’s deductible payroll tax in such a way that it would put the same amount of money in the worker’s pocket.

 Ting, who laid out budget priorities to expand healthcare to undocumented immigrants and increase tax credits for the poor, said Democrats in the Legislature will want to tinker with taxes—but that it was too soon to speculate.
 “We’re going to wait until the final plan lands and make adjustments,” he said.

 “To me,” Ting added, “there hasn’t been an appetite to do significant structural tax reform on behalf of a broader community. What we’re looking at is doing reform that will make a difference and put money back in the pockets of working-class and middle-class Californians. And we haven’t figured out how best to do that because we don’t know what Washington is doing yet.”

Latest in California's Pension Crisis

SACRAMENTO, CA - OCTOBER 27: California Governor Jerry Brown announces his public employee pension reform plan October 27, 2011 at the State Capitol in Sacramento, California. Gov. Brown proposed 12 major reforms for state and local pension systems that he claims would end abuses and reduce taypayer costs by billions of dollars. (Photo by Max Whittaker/Getty Images)

California’s Pension Crisis

Everyone is saying they just won a big court case on pensions. What does that mean for you?

California’s Pension Crisis

My turn: California’s other fiscal time bomb

California’s Pension Crisis

Jerry Brown’s last stand on pension reform

California’s Pension Crisis

My turn: California must keep its promise to our public servants

California’s Pension Crisis

My turn: Next governor will face hard fiscal realities

Tiffany Stelle and Donald Hui, teachers at Mission San Jose High School in Fremont, joined a tailgating action over stalled contract talks. An agreement has since been reached. Photography by Penni Gladstone for CALmatters

California’s Pension Crisis

California teacher pension debt swamps school budgets