Recently, Dan Walters in CalMatters gave an excellent summation about how California builds its budget on the backs of rich taxpayers and the inherent dangers of doing so when the economy turns down.
Within the article Walters suggested the Trump tax cut that caps state tax deductibility on federal tax forms may not be removed even if Democrats are in total control of Congress, despite Democratic politicians’ complaints about the measure. He’s right and the reason goes back to the country adopting the income tax in the first place.
As a reminder, the Trump tax cut capped the amount state income and property taxes could be deducted from federal taxes at $10,000. In wealthy states like California, high-end taxpayers are required to pay much greater sums to fulfill their state and local tax obligations.
Democratic politicians objected strenuously to this provision. There were two reasons for this. One, that the rich, tired of paying high state and local taxes without the benefit of a broader federal write-off, might look for greener tax pastures in no or low income tax states. Two, with the tax break limited, these wealthier taxpayers may more strenuously oppose future state income tax increases that targeted them. Taxing the rich is a well-established strategy among tax hungry politicians.
California politicians lead by then Senator Kevin de León tried to come up with a scheme to avoid the cap, but it failed.
As Walters noted, congressional Democrats recently voted to repeal the limit to help rich taxpayers, a move Walters labeled “dripping in irony” since Democratic presidential candidates want to tax the rich more. State politicians, especially in places like California and New York, also want to take more out of the pockets of the rich to fund government and they figure removing the federal limits would allow more opportunity to do so at state and local government levels.
Even if the Democrats capture both houses of Congress this coming election, removing the limits will not be a slam dunk. Most Americans are not affected by the deductibility limits and Senators and Representatives in those famously termed “fly-over states” would have little incentive to vote for the repeal that would chiefly benefit rich, coastal states.
This precedent can be found in the history of the United States establishing the income tax.
The U.S. first employed an income tax to help fund the Civil War. When that tax ended and Congress tried to establish an income tax decades later it fell on constitutional grounds in an 1895 decision by the U. S. Supreme Court. That caused Congress to consider a constitutional amendment to allow for a national income tax. The Sixteenth Amendment passed in 1913.
The original federal income tax hit high income taxpayers. During the debate one congressional member of a mid-west state delegation rose to support the income tax amendment. His reason for support: His constituents would not pay it!
That argument, which carried the day over a century ago, still has power in a debate over repealing a tax limit that primarily protects the rich, many of whom reside in the Golden State…at least they reside here for now.