Tax Reform and the “Double Taxation” Issue

Joel Fox

Editor and Co-Publisher of Fox and Hounds Daily


With the federal budget passing its first test yesterday, the focus in California will be on the effect of eliminating state and local tax deductions (SALT) on federal tax forms–what it means for California’s revenues and the issue of taxpayers paying what some see as double taxation.

Eliminating the deductions will hit many California taxpayers who deduct state and local taxes increasing their tax burdens. Studies indicate mostly high end income earners would be affected by the elimination of SALT. In turn, taxpayers may be less responsive to legislative efforts or ballot measures to increase taxes or to maintain the state’s current high tax rates.

Additionally, the debate will consider the question that more than one government would place taxes on their income or property.

All 14 California Republican congress members voted for the federal budget. Minority Leader Nancy Pelosi suggested by voting for the budget they would be accomplices in voting for a tax increase on fellow Californians. However, the opposite might be true in the long run. Excessive taxation when the state, local and federal taxes are combined might just lead to a revolt to lower state and local taxes.

Yet, how the taxes are structured is not yet known. Republicans in other high tax states like New York and New Jersey oppose the idea of ending SALT deductions and some California members, even voting for the budget, indicated they would work toward lessening the impact on the Golden State.

One argument supporting the idea of maintaining the current deductions is that without them, taxpayers face double taxation on their income or property. The National Taxpayers Union (NTU)  in Washington, DC, which supports the elimination of deductions, argued that the “double taxation” theory is flawed:

Double taxation occurs when income is taxed twice to finance the same set of government-provided benefits and services. For example, when the federal government levies taxes on shareholder dividends, that income has already been taxed once via the corporate income tax. In other words, the same dollar is facing two layers of taxation by the same government in order to finance the same set of federal programs. This is not the case with SALT. The dollar in question has been taxed by two different governments in order to finance two different sets of programs.

While the NTU logic may be sound, taxpayers who pay the freight might take a different view. I doubt taxpayers will buy that argument when they feel the tax pain. A taxpayer that sees more than one government hitting the same income probably feels like a piñata that’s been struck over again until more dollars fall out.

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