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The Federal Tax proposal, if passed, would negatively impact CA’s overall economy, workforce, business community, homeowners and quality of life.
According to the Tax Foundation, SALT is the most popular itemized deduction: of the approximately 44 million American households (about 30%) that itemized their deductions in 2013, about 43 million deducted what they paid in state and local tax. More than 55% of taxpayers earning over $75,000 a year take the deduction. The deductible state and local tax is just one type of federal assistance, and states that benefit the most from the provision actually rely less on Washington over all.
In 2015 California residents filed 17.8 million returns and roughly 12 million returns claimed standard deductions totaling $91 billion. Almost 20% of those returns came from districts represented by the 14 members of the CA Republican Congressional Caucus.
Californians deducted $140 billion in 2015 and $112.5 billion was in state and local taxes, according to the Tax Policy Center. Californians reported almost $53 billion for home mortgage interest and $32 billion for charitable contributions. The remaining deductions were attributed to real estate taxes, personal property taxes and medical expenses that would be eliminated under this proposal.
Because housing in the state is so costly, the proposal to cut in half the mortgage interest deduction from $1 million to $500,000 would affect some new homebuyers especially in coastal regions. The high cost of housing and related property taxes calculated on housing prices also plays in the reduction of the property tax write off to be capped at $10,000. Many homeowners would exceed that cap.
This proposal would greatly impact CA’s state budget. Only 70,437 tax filers contributed 40 percent of California’s total personal income tax in 2015. And the PIT covers 70 percent of the revenues the state takes in to fund a now $160B budget. The majority of these filers use deductions. Think about it – what would happen if 25 percent of the 70K high earners decide to pick up and leave CA when their marginal tax rates increase considerably under the Federal Tax proposal.
A recent WSJ Editorial even called the Federal Tax proposal out of line, referencing a “bubble rate: “The 45.6% is a bubble rate because it applies to tax-filing couples who make between $1.2 million and $1.6 million (above $1 million for single filers). The surcharge is intended to claw back any benefit these filers get from the new 12% income bracket that applies to income of less than $90,000 for couples ($45,000 for single filers). Republicans apparently think it’s unfair for people to pay the same rate on the same dollar of income. So their surcharge applies the 39.6% rate to those first dollars of income for those more affluent taxpayers, which adds about six-percentage-points to the top rate and gets to the 45.6% bubble rate. Add that to the 3.8% ObamaCare surcharge that Republicans are keeping as part of tax reform, and these taxpayers would now have a top marginal rate of 49.4%. Add state and local taxes, which would no longer be deductible against federal taxes (a policy we support), and these mostly Republican voters would in many states pay a marginal rate (on the next dollar of income) close to 60% and an effective rate (total share of income) higher than they do now. Keep in mind this is Republican tax policy.
Any loss of revenue due to federal changes will drastically impact CA’s budget and the budgets of state and local governments that funds billions in services related to education, transportation, health care, housing, etc. should make everyone take a second look at how the Federal Tax proposal would impact the entire state, i.e its economic growth and productivity and quality of life.
Finally, the WH and GOP want to pair the president’s pledge to renew critical infrastructure with a shift of responsibility for some of the costs from federally funded grant programs to state and municipal taxpayers. The SALT elimination would SALT elimination would greatly weaken this idea.
Repeal of the Historic Tax Credit
Owners of properties that are listed in or eligible for the National Register of Historic Places may take advantage of a 20% Federal tax credit that has become the most important incentive for historic preservation at a national level. During the past decade, hundreds of California buildings have been rehabilitated with the assistance of tax credits, generating over a half of billion dollars in private investment in the State of California.
The Low-Income Housing Tax Credit plays a role in financing practically all new affordable housing construction in America. According to data provided by the U.S. Department of Housing and Urban Development (HUD), the program produced 2,402,484 low-income housing units between 1986 and 2016. While the House’s tax proposal does include LIHTCs, the unexpected elimination of private-activity bonds would have devastating effects on the construction and preservation of affordable housing. The LIHTC program provides two types of credits for developers willing to put affordable housing units in their projects—the 9-percent credit and the 4-percent credit. The 4-percent credit can only be claimed if 50-percent or more of the project is funded using tax-exempt private-activity bonds. The House tax reform bill, dubbed the Tax Cuts and Jobs Act, proposes eliminating private-activity bonds, so while LIHTCs are explicitly retained in the bill, the elimination of the bonds would eliminate the 4-percent credit and likely lead to a precipitous drop in construction of low-income housing units produced by the program. These bonds contribute to 60-percent or more of the affordable rental housing built or renovated every year.
Repeal of the New Markets Tax Credits
Between 2003 and 2014, $3.39 billion in NMTC investments leveraged an additional $2.73 billion from other sources for a total of $6.12 billion in project financing to 444 projects and businesses in California. Those investments created 48,941 construction jobs and 27,233 permanent, full-time-equivalent jobs.
ACTION ALERT: Tell Congress salt must be preserved – not limited, restricted or modified in any way | Americans Against Double Taxation
Defend our Deductions | LA Times, June 12, 2017
Full Preservation of Federal Tax Deductions for State and Local Taxes | The Los Angeles Coalition
HR 1 – “Tax Cuts and Jobs Act” Preliminary Look – Potential Federal Impact on California Residents | CA Franchise Tax Board
HR 1- Letter to California Delegation in Opposition to Tax Cuts and Jobs Act | California Infrastructure and Economic Development Bank (IBank)
HR 1- Letter to California Delegation | California Department of Finance