The federal tax cut bill could enrich the California treasury initially.
Yes, this is the bill that Jerry Brown called a monstrosity.
Yes, this is the bill that the recent UC Berkeley IGS poll found California voters opposed by 51% to 30%.
Yet, as Brown’s Department of Finance works to put together a budget for next year, consider how the bill plays in California.
On the upside for the state treasury the tax cuts put more money in California taxpayers’ pockets. For the top end taxpayers in this state, federal tax rates drop from 39.6% to 37%. Yet, the deduction for state and local taxes is reduced. In fact, the reduced federal tax rates were put in place partly to offset lowering the deduction limits. Now only $10,000 can be deducted on income or property taxes. One government report states that Californians who deduct their state and local taxes average about $16,000 in deductions.
All this means more money remains with California’s high end taxpayers and they are the ones who primarily fund California’s General Fund because of the high income tax rates in the state.
More money the state can tax under California’s high rates means more money for the state treasury.
There is also the lower corporate tax rates in the federal law, lowering corporate rates from 35% to 21%, plus incentives to bring overseas revenues home to the United States. California corporations will benefit from the new federal tax cut while California coffers are sure to gain under the state’s corporate tax provisions.
The new federal law holds provisions that could raise the costs for the state. One is the elimination of the health care mandate. That potentially leaves 1.7 million Californians without health care. State leaders may choose to create a fund out of increased revenues for those individuals to subsidize health care costs.
No one can be certain at this time how the tax cut and its repercussions on state finances will play out or what methods tax advisors might devise to lower tax obligations. But despite all the gloom and doom about the federal tax cuts, California government may enjoy a boost of revenues when the new tax law is implemented.