MOORLACH UPDATE — Tax Cuts and Jobs Act — May 4, 2019

When it comes to financial issues, no one likes to be surprised. So, during my practice days, I would assist my clients with income tax projections when major events occurred, like significant tax law changes. This would eliminate surprises.

Another goal is to avoid large income tax refunds. During my practice days, keeping the additional funds in a bank account would generate a nice sum of interest income. The I.R.S. does not pay you interest on your excess withholdings.

This little preamble should set you up for the OC Register piece on the reaction by some to the Federal Tax Cuts and Jobs Act. My anecdotal survey finds that Orange County taxpayers were about 50/50. About as many saw a tax reduction as saw a tax increase. The piece provides better statistics, but it is always a good move to do an income tax projection at the beginning of the year to avoid surprises.

For a look back on the gimmick that I referred to, see MOORLACH UPDATE — SB 227 — January 15, 2018.

25th Anniversary Look Back

I have to marvel, in reflecting back 25 years ago, the words selected by the headline writers: thrust, risk, claims, rebut, turmoil and alert.

Mark Platte and Jeff Brazil of the LA Times were back on April 30th with “O.C. Treasurer Thrust Into Spotlight Over Risk Claims — Investments: Robert Citron, facing his first contested election in 24 years, points to high returns to rebut critics” (see https://www.latimes.com/archives/la-xpm-1994-04-30-mn-52163-story.html).

Not once did the LA Times do a lengthy profile on me. They never interviewed my wife to see how she was holding up during the campaign. In retrospect, it was a sad indictment on the state of journalism for me.

The OC Register showed its biases, too. In the May 2nd edition, under the banner of “Focus on Politics ’94,” on the the topic of “Orange County’s Treasury,” 3 of the 4 quotes favored the current treasurer and his investment strategy. Here is the one opposing quote that turned out to be correct and appropriate:

“That’s a highly, highly leveraged portfolio. For that to be happening with public trust funds is just wrong. The whole concept of that kind of leverage–you’re reading every day in the papers of all the companies getting burned on these derivatives. Citron is playing with things that the big guys are getting burned on.” Derek Lewis, 53, securities, Newport Beach

But, also on May 2nd, the Daily Pilot would give me some fair coverage in a front-page story, asking questions like: What was your inspiration to run for the office of county treasurer? You requested a large number of documents from Mr. Citron in order to do your own audit of the county’s investment strategy. Has he complied? How can you convince voters that you’re the right person to set things right? It was titled “Treasurer candidate Moorlach not your average accountant.” Here’s one of my responses:

“And we said from the beginning of the campaign, if interest rates go up, we have some serious problems. And I’m real sorry, but interest rates have gone up and there is no fail-safe, risk-free investment that out performs everybody in the country. Otherwise, everybody else besides Mr. Citron is downright stupid.”

On May 5th, 1994, Kevin Johnson of the LA Times was back with a gem, “O.C. Treasury Turmoil Puts Officials on Alert — Investing: Sanitation district contends it lost money after criticism by executive Robert L.Citron’s political foe. The county may delay refinancing bond money(see https://www.latimes.com/archives/la-xpm-1994-05-05-me-53991-story.html).

Moorlach dismissed the district’s contentions that it lost money as “weak political posturing by people who are not paying attention.”

“[Criticisms by the Moorlach campaign] are like a guy who runs into a theater and yells ‘Fire!'” {Peer Swan, the Orange County Sanitation District’s fiscal policy chairman} said. “This is real money we’re talking about. It would have been real easy to create a stampede.”

Moorlach, however, said he had no intention of backing down on his criticism of Citron’s practices and scoffed at the idea that debate from one campaign could place Orange County at a disadvantage in the marketplace.

Government is full of ironies. It would be Peer Swan who would demand withdrawals that started the “stampede” in the fall of 1994, eventually leading to the collapse of the County’s Investment Pool and the necessity for Orange County to file for Chapter 9 bankruptcy protection.

For the last edition of the Look Backs, see MOORLACH UPDATE — Capitol Dances — May 1, 2019.

Trump’s tax cut turns politics on its head in Southern California

Dems push for lower rate, while GOP leaders defend a code that raises bills for many

By Brooke Staggs

https://www.ocregister.com/2019/05/03/trumps-tax-cut-turns-politics-on-its-head-in-southern-california/

In the nearly 19 years that they’ve been married, high school teacher Brooke Leys-Campeau and her husband have received a big enough tax refund each year to pay the property tax bill on their modest Tustin home.

Sometimes, the refund was big enough to help cover the fees for their son’s travel baseball team, or voice lessons for their theater-loving daughter.

Not this year. Leys-Campeau, 43, said when the couple filed taxes they owed the federal government $1,000, a debt they say was a direct result of the 2017 tax plan championed by House Republicans and President Donald Trump.

Now, the Leys-Campeaus, like at least some other Southern California residents, are looking to Democratic politicians for relief from the GOP tax plan. It’s a reversal of a long-time political trope that suggests Democrats are the party of “tax and spend” and Republicans always whack taxes.

The Tustin family is in the minority, at least when compared with the rest of the country. Nearly two-thirds of Americans paid an average of $1,300 less in income taxes under the federal Tax Cuts and Jobs Act, according to the nonpartisan Urban-Brookings Tax Policy Center. Though this year’s tax refunds were down by about 2 percent, most people more than offset that with slightly bigger paychecks.

“The tax plan is working for Orange County families,” said Fred Whitaker, chairman of the Orange County GOP. “Between larger pay checks and tax refunds, working families are getting to keep more of their hard-earned money.”

But even Whitaker and some other Republicans say the tax plan, parts of which will sunset in 10 years, needs “fine tuning.” They note that many families in Orange County and similarly affluent areas were hit much harder than the rest of the country, primarily due to new limits on deductions available to homeowners.

Two former GOP House members who represented parts of Orange County in 2017 — Rep. Dana Rohrabacher, R-Costa Mesa and Rep. Darrell Issa, R-Vista — voted against Trump’s tax plan because it would boost taxes for many of their constituents.

The politics of Trump’s tax plan have already had some local impact.

In the 2018 midterms, voters in once staunchly Republican Orange County chose Democrats, not Republicans, to represent them in the House of Representatives. Though those results reflect many issues, political experts note it came after the GOP supported a tax plan that helped corporations and wealthy individuals while expanding the national debt and boosting the tax burden for hundreds of thousands of upper-middle class residents in states like California.

And now that Tax Day has come and gone, and Orange County homeowners have felt the real-world impact of a bill described as a tax cut for most Americans, local Democrats are hoping the issue will help them keep House seats in 2020.

Lots of people affected

The most significant hit for local residents is a new cap on deductions for state and local taxes, also known as SALT.

Americans have been able to deduct whatever they pay in state and local income, sales and property taxes from their federal tax bills — with no limits — since 1913. But Trump’s tax plan capped the SALT deduction at $10,000, even for married couples filing jointly.

Roughly one million Californians are expected to owe a combined $12 billion this year as a result of that new rule, according to estimates from the Franchise Tax Board. Californians who earn more than $1 million a year will carry two-thirds of that burden, but the tax board estimates that about 751,000 California households making less than $250,000 also will owe an extra $1.1 billion, an average of about $1,460 each.

A lot of those households are in Orange County, which is disproportionately affected because of high property values as well as high state taxes.

Exact numbers aren’t known.

Rep. Harley Rouda, D-Laguna Beach, commissioned a report that found 38 percent of homeowners in his 48th District — which covers much of coastal Orange County — who were able to deduct full SALT taxes in 2018 will essentially pay taxes on the same money twice this year because they hit the new $10,000 cap. And Rep. Katie Porter, D-Irvine, estimates that 37 percent of taxpayers in her 45th District, which runs from Irvine to Mission Viejo and through Anaheim, use the SALT deduction, with an average deduction of $18,200 per household.

“I have a lot of ordinary, middle-class clients with modest homes in ordinary areas who were hurt by this limitation,” said Vere Chappell, an accountant who for more than a decade has prepared tax returns in Orange County and surrounding areas.

For Laurice Strickland, a 64-year-old technical writer from Mission Viejo, the SALT deduction was really all she could claim to improve her tax situation as a single mom of grown children. With the new cap, Strickland said she lost out on $7,000 in SALT deductions this year, prompting her to take out a loan to help pay her youngest son’s college tuition.

“We shouldn’t be penalized for living in a high cost state,” she said.

Federal fix seems unlikely

Local House Democrats — along with representatives from other high-tax states, such as New York and New Jersey — are doubling down on efforts to undo the SALT cap. Several bills now pending in the House would remove or adjust that deduction limit going forward.

Porter led a bipartisan call for House Speaker Nancy Pelosi, D-San Francisco, and Minority Leader Kevin McCarthy, R-Bakersfield, to prioritize repealing the SALT cap this session. Reps. Rouda and Gil Cisneros, D-Yorba Linda, signed a letter supporting the effort.

Rouda is cosponsoring the SALT Act, or HR 1142, which would eliminate the SALT cap and pay for it by restoring the 39.6 percent individual income tax rate bracket. That bracket was dropped in the GOP plan, with wealthy earners now capped at a tax rate of 37 percent.

Porter didn’t back that bill because it would raise taxes on upper middle-class families, an aide said.

When asked how Porter suggests making up for the estimated $620 billion in tax revenue that would disappear if the SALT cap was removed, the aide said Porter is open to ideas such as “ending tax breaks for Big Oil and for companies that ship jobs overseas.” The aide said Porter thinks it’s unfair to raise taxes on Orange County families while companies like Amazon and Chevron paid no taxes in 2018.

Despite these efforts, most experts think a federal change to the SALT cap is unlikely this term.

The tax plan is considered the signature legislation of the Trump administration. And Sen. Chuck Grassley, R-Iowa, said earlier this year that he won’t consider tweaks to the SALT cap while he heads the Senate Finance Committee.

On the legal front, several liberal leaning states — New York, New Jersey, Maryland and Connecticut — filed suit last year against the Trump administration, claiming the SALT cap was illegal and designed to penalize blue states.

Due entirely to the disproportionate impact of the SALT cap, an April study by the Federal Reserve Bank of Atlanta found that the GOP tax plan increased long-term personal wealth by 1.6 percent in red states and 1.3 percent in blue states. California saw the smallest gains, at 0.9 percent.

The multi-state lawsuitover the SALT deduction cap is pending.

State SALT workaround dead?

Last year, Democrats in Sacramento proposed a few state workarounds to the federal SALT cap.

The legislature approved a bill from Sen. Kevin de Leon, D-Los Angeles, that would have let Californians skirt the $10,000 limit by giving them state tax credits that on federal filings would translate to charitable deductions. But Gov. Jerry Brown vetoed the bill in September, saying it “confuses an already complicated scheme and could invite intervention by the Internal Revenue Service.”

That’s why State Sen. John Moorlach, R-Costa Mesa — who serves as vice chair of the Senate Governance and Finance Committee — said he opposed what he described as “gimmicky” workaround proposals. Indeed, after New York, New Jersey and Connecticut approved similar laws, the IRS issued guidelines limiting how such charitable deductions could be claimed.

New York also approved letting employers voluntarily add a payroll tax, which employees could then claim as a credit come tax time. But just 262 businesses registered to participate in the program.

Moorlach said he hasn’t heard any new proposals for California workarounds to the SALT cap this session.

Whitaker, with the county GOP, argued that one state solution is in reach.

“If the Democrat supermajority in Sacramento wanted to fix the SALT deduction problem, they would lower taxes immediately,” he said.

Other deductions also at play

Since it doubled the standard deduction, the Tax Cuts and Jobs Act also took away most other itemized deductions that had benefited many Orange County families — from moving expenses to alimony payments.

Chappell said he had clients who are nurses and teachers and truck drivers who could no longer deduct expenses for things like certification courses or travel expenses.

“A lot of them — particularly in Orange County — were unpleasantly surprised.”

Linda Duffy, an Irvine homeowner who runs her own human resources firm, said she gets 100 percent of her business from referrals. That means lots of networking over coffee or business lunches.

Since she couldn’t write any of those expenses off this year, or claim her full SALT deduction, Duffy said she went from usually coming out even or owing a small amount to owing $9,000 in federal taxes this year.

Moorlach said he wasn’t able to deduct interest on the home equity line of credit he took out to help with his child’s college tuition, noting that the new law restricts those deductions. Going forward, Moorlach said he might instead consider refinancing his home, since that doesn’t come with the same restrictions.

The tax bill did allow residents to deduct more medical expenses this year, since it lowered the threshold to write off hospital bills from 10 to 7.5 percent of income. But that change expired Jan. 1, which means people with high medical bills could see their taxes go up slightly in 2020.

Porter recently introduced a bill that would permanently lower the threshold for deducting medical expenses to 7.5 percent of income.

Politics drive perception

No matter what the tax bills say, it’s clear that many voters in Orange County, and beyond, view the tax cut through the prism of their politics.

Some 60 percent of Californians aren’t happy with the new federal tax plan, according to a poll released on Tax Day by the Public Policy Institute of California. But opinions are sharply divided along party lines. Some 81 percent of Democrats disapproving of the law, often pointing to smaller refunds, while 71 percent of Republicans support it, pointing out that, for now, it’s saving most people some money.

Locals critical of the new plan said much of their frustration stems from who benefited most from the tax cuts.

This year, people earning between $50,000 and $75,000 got, on average, an after-tax income bump of $870, while people who earn $1 million or more got an average bump of $66,600, according to an estimate from the nonpartisan Tax Policy Center. Even when adjusting those changes to reflect a percentage of income, the numbers favor the wealthy — with the $50,000 to $75,000 crowd getting a 1.6 percent raise while the $1 million and up crowd gets an after-tax bump of 3.3 percent.

And over time, the individual taxpayer side of the tax bill is scheduled to sunset. By 2027, about 57 percent of Americans will be paying slightly more in taxes than they do now, while people earning $1 million or more will be getting an after-tax raise of $23,000, according to the Tax Policy Center.

Leys-Campeau, who supported Porter in the 2018 campaign, said she’d be OK with paying more in taxes if the money was going toward things like education or mental health programs. She’s less happy if the money is spent on items that rate higher for GOP politicians and supporters, such as a border wall and traditional military spending, while companies spend the money on stock buybacks.

“I’m paying more in taxes and there are people that don’t need the tax break that are getting the biggest benefit.”

The irony of the fact that she’s now turning to a Democratic congresswoman in Orange County for relief from a GOP bill that increased her taxes and “exploded” the national debt isn’t lost on Leys-Campeau.

“The 2016 election just changed everything,” she said.

For now, Leys-Campeau, suspects she and her husband will have to contribute less to charity and cut back on saving for their kids’ college.

They’ll be saving, she said, for a property tax bill due later this year.

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