A combination of state law and the outcome of sexual harassment cases in Sacramento could forestall California’s response to offset increased taxes under a federal tax bill.
Let’s state at the beginning that the tax plan coming out of Washington has not been finalized so much speculation is going into what the final plan will contain and how states will respond to it. However, given that early versions change the rules on deductibility of state and local taxes, California officials are looking for ways to minimize the impact since many Golden State taxpayers take advantage of the deductibility laws.
While provisions to allow tax deductions for property taxes survived in the senate tax bill, income tax deduction did not. Income tax deduction might come back in a reconciled bill. However, a number of state legislatures are considering a change to emphasize higher property taxes and lower income taxes to adjust to the provision of federal law (assuming it survives as currently written.) California doesn’t have that luxury since property taxes are strictly governed by the provisions of Proposition 13, which can only be changed by a vote of the people.
As reported in the Sacramento Bee, suggestions have been put forth to change tax provisions in California to reclassify state and local tax payments as federal charitable contributions or increase taxes on corporations, business owners and the wealthy.
However, this is where the repercussions of the sexual harassment cases could come into play. Tax changes require a two-thirds vote in the legislature. As I pointed out in a post last month, the two-thirds Democratic supermajority vote in the state senate would be jeopardy if Sen. Tony Mendoza loses his seat because of sexual harassment charges against him. Since then, Democrats have lost two seats—and the supermajority—in the Assembly, at least temporarily, with the resignations of Raul Bocanegra and Matt Dababneh.
This means any tax increases would require some Republican votes to achieve the necessary margin. Would any GOP lawmakers agree to vote for a tax increase on business in an effort to offset a tax increase on constituents who lose deductibility under a reformed federal tax code? You can be sure the business community would be out in force to oppose such a move.