California Republicans are about to vote for a major tax increase, on California Republicans. That’s what will happen when they pass the Congressional Republican tax reform bill that does away with the state and local tax deduction to your federal taxes, widely used by middle class Californians.
President Trump and Republican leaders have made a decision that their tax reform will be mainly to lower the corporate tax rate from 35 percent to 20 percent, which will bring America in line with the rest of the world. There is a good tax policy argument for this, especially if it brings back cash corporations are sheltering overseas.
But there is no good political argument for it. In populist times, corporations are especially unpopular, and polling shows that the tax bill is opposed by about two to one. Republicans, led by Speaker Paul Ryan and Senate Majority Leader Mitch McConnell insist this is really a middle class tax cut, but the numbers belie this.. While there are some small middle class breaks, as the Wall Street Journal pointed out, there is very little in the way of individual tax relief; this is a corporate tax relief bill.
The worst political problem it faces is that it has to be paid for. Even though Republicans are willing to increase the national debt by a billion and half dollars, that is not enough to cover the corporate tax reduction. Someone’s taxes have to go up to cover the cost, and middle class Californians are at the top of the list.
That’s because they have created a “red state” tax bill. The non-corporate tax relief, modest as it is, will flow mostly to red states as it is Republicans from those states that are writing the bill. The state tax write-off used mostly in high tax blue states like California, New York and New Jersey will be eliminated. Residents of these states will pay the cost of the corporate tax break.
This is not necessarily bad politics. Democratic Sens. Dianne Feinstein and Kamala Harris are never going to vote for the tax bill, so why not stick their state with the cost. It is like when former President Obama declared war on coal to satisfy his environmentalist backers – it affected people in West Virginia and Appalachian states that never voted for him in the first place.
George Skelton in the Los Angeles Times crunched some numbers to show what losing the state tax deduction would mean to Californians. “Roughly 6 million California taxpayers — one-third of the total — itemized on their 2015 federal tax returns, taking an average of $18,400 in deductions for state and local taxes. That amounted to approximately $113 billion in deductions for all of California, according to the state Finance Department,” he writes.
So this is a $113 billion increase on Californians’ taxable income that will fall on those who itemize their deductions, middle and upper middle class taxpayers, in other words the Republican base voters in California.
Whether the increase actually reaches that level depends on what Congress does with the property tax deduction. The House bill would keep it but cap it at $10,000. Reportedly the Senate bill does away with all state and local tax deductions.
But even here again, California is the loser. Many red states actually have higher property taxes than does California with its Proposition 13 lid. So we would get less by keeping the property tax deduction and lose more if the deduction for our high state income taxes went away.
Republicans next year would like to run against the recently enacted gasoline tax increase, and are supporting an initiative to roll it back. But as Skelton points out, the California Department of Finance estimates the annual cost of the gas tax increase at $117 per driver. That pales in comparison with an average loss of $18,000 in federal tax deductions. The tax increase for the average middle class taxpayer could be thousands of dollars.
And yet the majority of California’s 14 Republican House members are lined up to vote for this tax increase on their constituents. That is because they will depend on the GOP House leadership to help them survive costly campaigns next year; Democrats are already targeting at least 10 of the 14 members.
A preview of what could easily happen to California’s legislative and congressional Republicans in 2018 can be seen in Virginia’s state election on Tuesday. Not only did GOP candidates lose the statewide offices much worse than expected, but at least 15 Republican members of the Virginia House of Delegates lost, reducing the GOP from two thirds control ofthe Virginia House to possible minority status when all the races are decided.
Democrats proved in Virginia that antipathy toward Trump can be leveraged down ballot. Most of the attacks on incumbent GOP House members in California thus far are just part of the anti-Trump fury in this state. But their opponents will certainly have something to talk about when House Republicans vote to increase taxes on middle class Californians in the billions of dollars, as they seem determined to do.