The Federal Tax Act of 2017 was certainly the big news in the month of December. State Senators, including myself, received calls complaining about our “votes” for this Federal bill. It became very obvious during the Christmas season that many constituents need to take a civics class, as State Senators do not vote on Federal legislation. But, I digress.
This Federal Income Tax Act of 2017 is as significant as the 1986 Tax Reform Act, which really changed my life as a recently admitted partner to the CPA firm of Balser, Horowitz, Frank & Wakeling.
This time, limiting state tax deductions to $10,000 is major. Increasing the standard deduction for married couples to $24,000 is a big deal. Lowering tax rates is a major move. But, a significant number of constituents in my District will not be amused. And our county Treasurer-Tax Collectors received a major increase in early April real property tax second installment payments in December.
What to do? The Democrats implicitly state through their legislative votes that they despise the wealthier residents of California (see MOORLACH UPDATE — More Taxes With SB 567 — May 18, 2017). When I recently protested a proposed tax increase on millionaires, I was complimented for defending the “yacht owners.” Their disdain is that visceral.
Now the Democrats want to institute a contrivance to make tax payments to the Franchise Tax Board deductible as charitable contributions. Cute. Comical, really. So, as a dues paying Certified Public Accountant, I’m looking forward to their legislation. In the meantime, let’s review some definitions.
Contribution: A gift or payment to a common fund or collection.
Contrivance: The use of skill to bring something about or create something (that gives a sense of artificiality).
An idea that is too cute by half will probably meet a quick downfall. All the Internal Revenue Service has to do is issue a Revenue Ruling to squelch this proposal. For the joys of how Revenue Rulings can be disruptive, see MOORLACH UPDATE — Critical Federal Tax Reform — November 28, 2017.
State personal income tax has to be paid. So characterizing it as a contribution is disingenuous. One can take a contribution deduction when it is a gift, over and above the value of what is received. It’s not a donation when there’s a gun pointed at your head forcing you to pay it.
Capital Public Radio came by this week to inquire about my reactions and they are provided in the first piece below. You can hear the audio by clicking on the link.
This week’s San Francisco Chronicle piece (see MOORLACH UPDATE — 2018-2019 Budget Recommendations — January 4, 2018) generated a published Letter to the Editor in yesterday’s edition. It’s a little snarky, too. But, at least it was complimentary. You’ve got to admit that public employees are on the ball. It’s the second piece below.
BONUS: I’m having an event on January 26th and you are cordially invited to participate. For more information, see https://www.efundraisingconnections.com/c/Moorlach2020/EveningReceptionJan2018.
California, Other Blue States, Look To Circumvent Federal Tax Change
California, New York and other large, left-leaning states are pushing back against the federal tax overhaul signed by President Trump last month, particularly a provision that puts them on the hook for a greater share of federal revenue. Put simply, they don’t want to pay.
“As Washington has shot an arrow aimed at New York State’s economic heart, the best plan is to get out of the way before it hits,” New York Gov. Andrew Cuomo said in his annual State of the State address on Wednesday. “So, we are exploring the feasibility of a major shift.”
The new law no longer allows taxpayers to write off more than $10,000 of state and local income and property taxes from their federal returns. New York — along with California, Massachusetts and other large, blue states — has some of the highest taxes and property prices, so they will feel the brunt of the loss of state and local tax deductions, also called SALT deductions.
Democrats in these states say Republicans in Washington intentionally targeted their states.
“They went out of their way to really penalize our taxpayers,” said California Assembly budget chairman Phil Ting, a Democrat from San Francisco. “So, we’re really looking at ways we can mitigate that for our tax base, and we’re looking at a variety of proposals.”
Many of these proposals are based off an analysis by 13 tax law professors, which explores ways individuals, businesses and states could look to take advantage of loopholes in the new tax law. Some might sound pretty zany.
In California, state Senate leader Kevin de León has a proposal for taxpayers to give to a new state-run charitable fund, called the California Excellence Fund, in exchange for a refund on income taxes. Californians donate to the charity and receive a credit that wipes away their state income tax liability. The charitable contribution is then federally deductible.
UCLA professor Kirk Stark has championed this idea. He says the Internal Revenue Service has sanctioned similar arrangements on a smaller scale, including when taxpayers give to the Cal Grant program for low-income college students.
“There’s no limitation whatsoever indicating that the donation or contribution has to be targeted to some specific program or something like that,” Stark said.
But Stark also acknowledges the IRS could react to the measure by trying to impose a limitation.
In New York, Cuomo says the state is looking to shift from income taxes to a new payroll tax — which businesses could still deduct, but would probably require employees to take lower pre-tax salaries.
David Kirk, a partner at accounting firm Ernst & Young, says that proposal comes with other problems.
“It’s payroll, which is inherently regressive,” Kirk said. “The billionaires, regardless of what state you’re in, have a relatively small W-2, relative to their overall wealth and income.”
California Republican state Senate leader Patricia Bates says the state has another option.
“I think that the best idea is for our Legislature to take a long, hard look at the tax rate that we put on Californians,” Bates said. “We can do a lot with that, because we have the power here to reduce taxes.”
She says Democrats are looking for any reason to clash with the Trump administration.
“That has certainly been the MO for the last year that we’ve been up here, since President Trump was elected,” Bates said. “It’s not the best way to go.”
Who really pays?
Most Californians do not use SALT deductions. Only about a third of filers have typically claimed them, and many of those still do not get the deductions, because they must pay the Alternative Minimum Tax.
And, because of other cuts in the tax overhaul targeted to wealthier income brackets, Kirk says most households will not pay more next year as a result of losing the deduction.
The ones who will pay more are “the individuals with the higher amounts of income — maybe over $600,000 — what you might call the working wealthy [with] large W-2s,” Kirk said. “What you’re probably going to end up seeing is a break-even for a vast majority of people.”
“It’s just that relative to someone in a low-tax state, their tax cut might be smaller,” said Frank Sammartino, a senior fellow at the Tax Policy Center.
In other words, with the loss of the SALT deduction, a state like California is now even more costly for higher-income taxpayers in comparison to a bordering state like Nevada, which has no income tax.
Economic analysts have said it could also make it more difficult for local and state governments in higher-tax states to gain public support for new taxes.
“It will blunt the effect of lower federal rates for many taxpayers,” Moody’s Analytics reports. “Public resistance to tax increases will likely rise, and that in turn will constrain local governments’ future revenue flexibility. In addition, if larger federal deficits caused by the tax cuts result in attempts to cut entitlement spending, states will be pressured to backfill cuts to federal funds from their own budgets.”
Some California Republicans are weighing whether they would support Democratic proposals to avoid the hit. State Sen. John Moorlach doesn’t rule it out.
“We’re going to benefit those we really need to keep here, because if we lose any of our top 1 percent, we lose a portion of about 50 percent of our income taxes,” Moorlach said.
A former accountant, Moorlach’s main concern is that the proposals being floated are “too cute.”
“I just wonder if it’s really something that should be pursued, because it will be squashed [by the IRS],” he said.
States are considering one other tactic to fight the loss of the SALT deduction — one that brought Cuomo a long ovation during his State of the State speech: Sue it as double taxation.
“We believe it is illegal, and we will challenge it in court as unconstitutional,” Cuomo said.
New Jersey has also threatened a lawsuit, while California Attorney General Xavier Becerra says he’s reviewing legal options.
Pensions should be honored
Concerning “More money than expected for new budget” (Open Forum, Jan. 4): Thank you, state Sen. John Moorlach, R-Costa Mesa, for urging Gov. Jerry Brown to use some of the $7.5 billion in surplus state funds to prepay public employee pension debt and pay down state retiree medical liabilities.
With many Baby Boomers now reaching retirement age, it is imperative that California be able to meet its pension obligations to its career teachers, nurses, firefighters and police officers. These public servants, often criticized in the media for their unions, deserve praise for the important services they provide every day to the citizens of this state. Their contributions to our well being — and to their pensions — should be honored.
Sasha Englander, San Bruno
This e-mail has been sent by California State Senator John M. W. Moorlach, 37th District. If you no longer wish to subscribe, just let me know by responding with a request to do so.