Federal Tax Reform Update and Fact Sheet for Californians

When the Trump Administration, the House Committee on Ways and Means, and the Senate Committee on Finance released the “Unified Framework for Fixing Our Broken Tax Code” in late September 2017, California’s State Controller’s Office put together a Federal Tax Reform Fact Sheet for Californians.

Then last week the United States House of Representatives passed its 2018 budget resolution in a party-line vote that represents a step toward its goal of sending tax-reform legislation to President Trump. The vote was 219-206, and the approved budget resolution sets up a process for shielding the GOP tax bill from a filibuster in the Senate. A total of 18 Republicans voted against the resolution, along with all the Democrats who were present.

A key holdout bloc consisted of Republican lawmakers from states with high local tax burdens who have resisted the GOP’s plan to eliminate, or at least scale back, the income-tax deduction for state and local taxes.

Twelve Republicans from the high-tax states of New York, New Jersey and Pennsylvania, where many voters stand to be hit hard if the deduction is eliminated, voted against the budget after no deal emerged to preserve it. The GOP was able to secure some members from middle-class districts with a proposal to cap SALT, which would reduce the impact a full elimination would have on their district’s taxpayers.

All 14 members of California’s Congressional Republican Caucus voted for the budget bill, even though its passage would have a massive negative impact on Californians. Three members of the caucus have publicly stated they are against the elimination of SALT, but they voted for the bill, most likely seeing a SALT cap proposal as more palatable to their district’s taxpayers.

The members are understandably parochial in nature, but one thing a lot of them are overlooking is the impact any limitation on deductions, relating to SALT, mortgage and property taxes would have on the overall tax base that supports CA’s annual budget.

The fact is only 70,437 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.

Relying on so few Californians to fund a budget that funds billions in services related to education, transportation, health care, housing, etc. should make everyone take a second look at not only how the federal reforms impact the entire state, but a seemingly annual increase in state and local taxes and fees continues to hold back certain aspects of economic growth and productivity.

Think about it – what would happen if 25 percent of the 70K high earners decide to pick up and leave CA? That is a big hole to fill.

For now the Unified Framework is short on detail and is constantly changing and the Franchise Tax Board is not in the position to perform any modeling on how the various federal tax proposals, including capping the SALT deduction, may affect Californians or the state budget.

Please take a look at the Federal Tax Reform Fact Sheet for Californians to better understand how we currently stand as a state in regards to taxes. As you will see, page two of the document addresses the SALT deduction based on federal and California 2015 tax data. Please remember that this document is in draft form because the federal tax proposals are not finalized.

Please feel free to share this email with any elected officials or other civic leaders in your network to highlight the importance of these issues and the impact they could have on all Californians.