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After federal tax reform

Posted on January 8, 2018 by Sonoma Valley Sun

With great weeping and gnashing of teeth, California Democrats have excoriated the Republican-controlled Congress and President Trump for the passage of the recently enacted tax reform measure.

You wouldn’t know it from mainstream media rhetoric, but most Californians will be better off from the legislation due mostly to the reduced tax rates and a near doubling of the standard deduction. Nonetheless, some higher-wealth citizens might pay slightly more because of the $10,000 cap on state and local tax deductions. This is particularly true for those who pay high income and property taxes.

Whether it’s a legitimate effort to help those few Californians who may be disadvantaged by the new federal law or just another scheme to demonstrate anti-Trump street cred, Democrats are trying to find ways to neutralize or counter the higher taxes on the state’s well-to-do. (And here we thought Republicans were the party of the rich).

One strategy is to find a way to convert the deduction that Californians currently take for state and local taxes into some other deduction recognized by the IRS. Specifically, and a proposal just announced by California state Senate Leader Kevin de León, is to allow tax filers to make “charitable contributions” to the state.

Exactly how this would work isn’t clear but here’s the basic strategy: Allow taxpayers — again, this would just be a small percentage of Californians — to make charitable contributions to state coffers in exchange for a tax credit. Then, they could deduct that contribution on their federal return, because the new tax reform law doesn’t limit charitable deductions unless they exceed 60 percent of adjusted gross income.

For example, let’s say Joe Taxpayer, a successful wealth manager who lives in San Francisco, has $50,000 in state income and property taxes in 2018. Under the new law, he can only deduct $10,000 of that on his federal return. Looking for a way to keep the remaining $40,000 worth of deductions, he would make a $40,000 charitable contribution to the state in exchange for a tax credit of the same amount on his state return. Then, he would claim a $40,000 charitable deduction on his federal return in addition to his $10,000 SALT deduction.

File this under “too clever by half.”

First, the IRS itself might take a dim view of a tax avoidance strategy whereby a state enacts laws that, in essence, allow state taxpayers to pay their state taxes in a manner specifically designed to avoid federal tax liability. The argument would be that these payments would be outside the scope of traditional charitable contributions such as to a church, the Red Cross or a college.

Second, even if this were a defensible strategy under existing law, Democrats should realize that what Congress giveth, Congress can taketh away. Disallowing this strategy via Congressional enactment would not be difficult at all.

Finally, the Democrats pushing this strategy (most notably “I’ve-got-to-be-relevant-to-challenge-Dianne-Feinstein” Kevin de León) are missing the easiest solution to the problem of California being at a relative disadvantage due to the reduction of the SALT deduction: Lower California taxes. This is not rocket science.

Whether one loves or hates the policies emanating from the nation’s Capital, it is impossible to deny that tax reform, sane regulatory policies and a pro-business mentality has invigorated America’s economy. For eight years we were told that 2 percent economic growth was “the new normal” because of technological changes and an evolving world economy where the U.S. was merely a player and nothing exceptional. How foolish that sounds now with rapid growth in GDP in just one year.

Although it is unlikely that they will do so, the Democrats who control every lever of power in California ought to at least pause and consider major tax, regulatory and spending reform. Across-the-board tax reductions would significantly lessen whatever harm has been inflicted on wealthy Californians due to the loss of the SALT deduction.

It should be noted that, in large part, California’s own Nancy Pelosi is to blame for the loss of the SALT deduction. She gambled that by holding every single Democrat in the House of Representatives off the bill, they could defeat it. But if both she and Chuck Schumer on the Senate side had for a brief moment curbed their Trump Derangement Syndrome, these powerful representatives of the high-tax states may have prevented this from happening.

Instead of over-the-top rhetoric about how evil the tax reform bill is, (something that does not hold up to even cursory review) California Democrats ought to adopt policies that actually work, would grow the economy and provide tax relief for California’s nearly 40 million residents.

Jon Coupal, president of the Howard Jarvis Taxpayers Association

3 thoughts on “After federal tax reform

  1. Please dear Sun,

    If you are going to keep running these things, please, please, please, go out and get something written by a reputable economist to run with it. As I have said before, readers think this person is an expert with proven facts. I know you have to publish opinions, but when these things run where fallacy is presented to look like facts, it does your reader no favors.

  2. Mr. Coupal’s ‘Howard Jarvis Taxpayer Association’ opinions are to be commended as regular examples of why Mark Twain (or was it Lincoln?) cautioned: “Better to remain silent and be thought a fool than to speak and remove all doubt.”
    The CA tax strategy to offset the rip-off of its citizens by the Nazi-controlled Congress and which Mr. Coupal derides as unlikely to pass muster with the IRS is the very same strategy employed in Confederate states where laws allow religiously obsessed patriots to deduct their childrens’ tuition to right-wing Christian schools as ‘charitable contributions’ deductible for federal tax purposes.
    As to his advice to develop policies which would grow the economy and provide tax relief to Californians, he apparently is unaware that California’s economy is the 6th largest in the world, and of all the states contributes the most in taxes to support the federal government, without which the US would long ago have been taken over by Nambia or Normay or another such country his hero, Trump, believes actually exist.
    His opinions remain valuable examples of what happens when poor education and 19th century thinking collide with 21st century reality. Kudos to the Sun for being willing to print them.

  3. I have no problem with the Sun publishing them. But, they are full of statistical errors. I also do not think CA can “get around” the Trump tax scam by implementing these things. It would just be nice if the Sun also ran actual pieces written by economists with real data. Mr. Coupal stating that the tax scam is nothing to worry about. “and that Instead of over-the-top rhetoric about how evil the tax reform bill is, (something that does not hold up to even cursory review)” It has been reviewed and the real data is available. It will hurt people and therefore it can be categorized as evil.

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