Gov. Jerry Brown called the idea of eliminating state and local tax deductions from federal taxes “horrible” tax policy. Congressman Darrell Issa in support of the plan argued that the bad tax policy was the California tax increases supported by Brown. The tug of war between Brown and Issa–and between Democrats and Republicans–on state and local tax deductions is more than about tax philosophy—it is about who gets the money.
How often in California have we heard that we must tax the rich so that the rich pay their fair share? The plan put forward by Republicans in Congress to eliminate state and local tax deductions from federal taxes will increase taxes mostly on the rich here, yet state Democrats, led by Governor Brown, object.
Over the weekend, the Wall Street Journal criticized a rumored new top tax bracket for the rich in the Republican tax reform plan and used California as an example of the extreme effect it would have.
With the current top marginal tax rate is 39.6%, the Journal editorial said to avoid charges that tax reform will help the rich, a new top rate up to 44% is being considered by Republican leadership. The Journal editorial then pointed to California’s high-end income tax rate of 13.3% and argued under such a change in the federal tax code, some Californians’ top marginal rate would approach 60 cents on the dollar.
Now that’s taxing the rich. Shouldn’t advocates of taxing the rich rejoice?
Republicans in Washington want the $112 billion Californians write off their federal taxes to help offset the proposed federal tax cuts. Advocates of the tax reform believe that the tax cuts will stimulate the economy, which will improve incomes for the taxpayers and help offset the money they would be required to send to Washington under the new tax law.
But California is a high tax state. It relies heavily on the high-end income taxpayers to balance its budget and a blow of increased federal taxes would potentially upset the state’s tax structure, balanced so precariously on taxing the rich.
Congressman Issa made reference to this issue when he rebuked Governor Brown for sending a letter to all California Republicans to oppose the state and local tax deductions. Issa, in his letter responding to Brown, wrote that California’s high combined state and local taxation “in no small part” was due to Brown’s lobbying for and passing Proposition 30, the income tax increase that created the high end rate of 13.3%.
Brown’s concern is that with $112 billions being sent to Washington and with little faith that the stimulus to the economy will make up anywhere near the dollars sent away, the California economy would falter. Even more, California taxpayers who are paying such a high toll might look for greener pastures, such as neighboring Nevada, with no income taxes. With California so reliant on high-end taxpayers, if enough move, the rickety California tax structure could crumble.
Both the feds and the state want the revenue from the state’s top taxpayers to fund their plans and the taxpayers are caught in the middle of this tug of war.