The Republicans’ proposed tax overhaul has received plenty of criticism, but some of the fiercest complaints have come out of high-tax states like California. Any tax pro who prepares California income taxes as well as business owners in the Golden State should be paying close attention to these developments.
Why the hubbub? The Tax Cuts and Jobs Act would eliminate state and local tax deductions, something claimed by tens of millions of Americans who write off state and local taxes to reduce their federal income tax.
“State and local income and real estate taxes make up the bulk of total state and local taxes deducted (about 60 percent and 35 percent, respectively), while sales taxes and personal property taxes account for the remainder,” reports the Tax Policy Center. “The state and local tax deduction is one of the largest federal tax expenditures, with an estimated revenue cost of $96 billion in 2017 and $1.3 trillion over the 10-year period from 2017 to 2026.”
‘New York Will Be Destroyed’
How much would that hurt? New York Governor Andrew Cuomo said it would hurt plenty: “New York will be destroyed,” he tweeted, “if the deductibility of state and local taxes is included in any final plan that passes the House.”
The state and local tax deduction—you may hear it called SALT for short—was the biggest tax break given the axe by the new tax proposal. Besides closing a $96-billion loophole, eliminating the break relieved low-tax states from effectively subsidizing high-tax states and removed a perk for high-earners who itemize their taxes.
More than 30 percent of returns filed in California claim the SALT. Other high-claim states are New York, Connecticut, Maryland, New Jersey, Utah, Colorado, Oregon, Georgia and Delaware. States where the SALT is less frequently claimed include Nevada, Wyoming, both Dakotas, Texas, Arkansas, Florida and Tennessee, noted Vox. A repeal of SALT would hit residents of California, Illinois, New York, Maryland, the District of Columbia, New Jersey, Connecticut and Massachusetts with at least a $2,500 average tax increase.
Use of the SALT is primarily an American quirk. “Most other rich countries with federal systems, like Canada and Germany, don’t have a state or local tax deduction,” Vox added. “Instead, they rely on ‘equalization payments,’ in which the federal government directly distributes grants to poorer states and provinces to make sure all states/provinces have adequate fiscal capacity.”
So far, California and other similarly-positioned states have only reacted verbally to the threat of the SALT elimination. But officials are warning that the cuts could have a bottom-line impact on education and local spending.
California in particular has three taxing agencies—Franchise Tax Board, Board of Equalization and the Employment Development Department—that work together, as well as conformity differences, differences due to federal extenders and provisions made permanent at the end of 2015 by the PATH Act.
“Officials in California now predict that the GOP tax bill could transfer tax dollars paid by millions of Californians to other states—making it tougher for both the state government and local entities to find the revenue for needed services in the future,” reported Politico. “That’s especially worrisome for California at a time when the Trump administration and the Republican Congress have already proposed to slash spending on other programs, cuts that would further stress the state’s finances.”
Get Tax Insight from a Pro
California’s state income tax is already complicated enough, notes tax expert Vicki Mulak, whose conference for Eli Financial, “California Tax Tutorial,” takes an in-depth look at California conformity and nonconformity issues, taxes on individuals, taxes on businesses and taxes on fiduciaries and beneficiaries. Mulak will also lead a tutorial on how to file California state taxes and show participants how to become proficient in solving the state’s unique tax challenges.
To join the conference or see a replay, order a DVD or transcript, or read more