With great weeping and gnashing of teeth, California Democrats have excoriated the Republican-controlled Congress and President Trump for the passage of the recently enacted tax reform measure.
You wouldn’t know it from mainstream media rhetoric, but most Californians will be better off from the legislation due mostly to the reduced tax rates and a near doubling of the standard deduction. Nonetheless, some higher-wealth citizens might pay slightly more because of the $10,000 cap on state and local tax deductions. This is particularly true for those who pay high income and property taxes.
Whether it’s a legitimate effort to help those few Californians who may be disadvantaged by the new federal law or just another scheme to demonstrate anti-Trump street cred, Democrats are trying to find ways to neutralize or counter the higher taxes on the state’s well-to-do. (And here we thought Republicans were the party of the rich).
One strategy is to find a way to convert the deduction that Californians currently take for state and local taxes into some other deduction recognized by the IRS. Specifically, and a proposal just announced by California state Senate Leader Kevin de León, is to allow tax filers to make “charitable contributions” to the state.
Exactly how this would work isn’t clear but here’s the basic strategy: Allow taxpayers — again, this would just be a small percentage of Californians — to make charitable contributions to state coffers in exchange for a tax credit. Then, they could deduct that contribution on their federal return, because the new tax reform law doesn’t limit charitable deductions unless they exceed 60 percent of adjusted gross income.
For example, let’s say Joe Taxpayer, a successful wealth manager who lives in San Francisco, has $50,000 in state income and property taxes in 2018. Under the new law, he can only deduct $10,000 of that on his federal return. Looking for a way to keep the remaining $40,000 worth of deductions, he would make a $40,000 charitable contribution to the state in exchange for a tax credit of the same amount on his state return. Then, he would claim a $40,000 charitable deduction on his federal return in addition to his $10,000 SALT deduction.
File this under “too clever by half.”
First, the IRS itself might take a dim view of a tax avoidance strategy whereby a state enacts laws that, in essence, allow state taxpayers to pay their state taxes in a manner specifically designed to avoid federal tax liability. The argument would be that these payments would be outside the scope of traditional charitable contributions such as to a church, the Red Cross or a college.
Second, even if this were a defensible strategy under existing law, Democrats should realize that what Congress giveth, Congress can taketh away. Disallowing this strategy via Congressional enactment would not be difficult at all.
Finally, the Democrats pushing this strategy (most notably “I’ve-got-to-be-relevant-to-challenge-Dianne-Feinstein” Kevin de León) are missing the easiest solution to the problem of California being at a relative disadvantage due to the reduction of the SALT deduction: Lower California taxes. This is not rocket science.
Whether one loves or hates the policies emanating from the nation’s Capital, it is impossible to deny that tax reform, sane regulatory policies and a pro-business mentality has invigorated America’s economy. For eight years we were told that 2 percent economic growth was “the new normal” because of technological changes and an evolving world economy where the U.S. was merely a player and nothing exceptional. How foolish that sounds now with rapid growth in GDP in just one year.
Although it is unlikely that they will do so, the Democrats who control every lever of power in California ought to at least pause and consider major tax, regulatory and spending reform. Across-the-board tax reductions would significantly lessen whatever harm has been inflicted on wealthy Californians due to the loss of the SALT deduction.
It should be noted that, in large part, California’s own Nancy Pelosi is to blame for the loss of the SALT deduction. She gambled that by holding every single Democrat in the House of Representatives off the bill, they could defeat it. But if both she and Chuck Schumer on the Senate side had for a brief moment curbed their Trump Derangement Syndrome, these powerful representatives of the high-tax states may have prevented this from happening.
Instead of over-the-top rhetoric about how evil the tax reform bill is, (something that does not hold up to even cursory review) California Democrats ought to adopt policies that actually work, would grow the economy and provide tax relief for California’s nearly 40 million residents.
Jon Coupal is the president of the Howard Jarvis Taxpayers Association.