California Dem pols scrambling in wake of cuts to deductibility of state and local taxes

You'll never believe the scam being considered by California's Democrats to defraud the IRS. They know they have a huge problem. Roughly half of the state’s income tax receipts are paid by the top one percent of taxpayers, and the personal cost of those taxes just went up over one-third, now that they cannot be deducted from taxable federal income under the terms of the new tax reform just signed into law. For the wealthiest California taxpayers, those earning over $426,700 a year, the impact will be a marginal loss of over five percent of their after-tax income on amounts over 426k (13.3% x 39.6% = 5.27%).

A five percent pay cut is enough to motivate change, as even a Democrat can see (if not admit when considering a tax hike).  So the most powerful man in the state legislature, Senate president pro tem Kevin De Leon, is letting it be known that the state is considering a response.

Kevin de Leon (birth name: Kevin Alexander Leon)

Needless to say, cutting state spending, such as ending the farcical “high speed” rail project or requiring legal residency for non-citizens using state services, is not on their list. Not yet, at least.

Liam Dillon of the Los Angeles Times reports on two options being considered:

1. Reducing state personal income taxes through a tax credit program and offsetting that amount through payroll taxes. 

2. Allowing individuals to make voluntary gifts to the state of California, which would be deductible as a charitable donation under federal law. The deduction for the donated amount would replace the state and local tax deduction.

Option number one would effectively cut the taxes on high income earners and replace them with less progressive payroll taxes, presumably hitting middle and perhaps even lower income Californians. In the long run, depending on the taxes of the highest income earners is not viable, as these people tend to be mobile and highly aware of their tax burden.  Connecticut, which similarly depends on the income taxes from high earners but lacks the appeal of climate, lifestyle, and scenery California enjoys, already is seeing high income earners move away in significant numbers.

But option number one does hit larger numbers of voters making them aware of the cost of free stuff from the state.

Option number two sounds like a pure scam, and no doubt would be challenged by the IRS or Treasury Department. If the state were to credit “donations” against tax liability, then those donations could be challenged as a ruse to escape federal taxation, because “something of value” (release from state tax liability) would have been received in return for the “donation.”  That makes the “donation” not eligible for federal tax deductibility under current regulations.

De Leon is planning to run for the United States Senate next year, and wants national prominence. His rhetoric is already reflecting an incoherent anti-Trump profile:

“The Republican tax scam disproportionately harms California taxpayers,” Senate President Pro Tem Kevin de León (D-Los Angeles) said in a statement. “Our hard-earned tax dollars should not be subject to double-taxation, especially not to line the pockets of the Trump family, hedge fund managers and private jet owners.”

In truth, the hedge fund and private jet crowd are the ones getting hosed by the new tax plan, and De Leon’s scheme is the one that seeks to line their pockets (or at least prevent their pockets from suffering a 5% loss on marginal income over $426k). "Champion of the super-rich" is not a profile any California Democrat wants to embrace.

In point of fact, the tax reform has created a huge problem for free-spending pols in the Golden State, as it was intended to do.

Next year will see this drama play out. It will be highly amusing to see how long it takes for Democrat pols to realize that spending is the root of the problem. As an old bumper sticker used to say, “Reality bats last.”

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