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Why Trump’s tax plan may be the best thing for California

October 2, 2017

President Trump believes people no longer should be allowed to deduct state and local taxes when calculating their federal income taxes. And they shouldn’t. He’s right.

 

That may sound nutty and even disloyal coming from a Californian. Millions of state residents, after all, would be hammered by elimination of the state and local tax deductions.

 

But let’s be intellectually honest. There’s no credible justification for the federal government subsidizing California’s highest-in-the-nation state income tax — or, for that matter, any local levy like the property tax.

 

Why should federal tax money from people in other states be spent on partially rebating Californians for their state and local tax payments? Some of those states don’t even have their own income tax, including Nevada and Washington. Neither do Texas and Florida.

 

The federal subsidies just encourage the high-tax states to rake in more money and spend it. And they numb the states’ taxpayers.

 

Former California Gov. Ronald Reagan tried to dump the state and local tax deductions after he became president.

 

“I don’t believe that we can justify a system that forces taxpayers in low-tax states to subsidize the big-spending policies of a few high-tax states,” Reagan said.

 

President Trump believes people no longer should be allowed to deduct state and local taxes when calculating their federal income taxes. And they shouldn’t. He’s right.

 

That may sound nutty and even disloyal coming from a Californian. Millions of state residents, after all, would be hammered by elimination of the state and local tax deductions.

 

But let’s be intellectually honest. There’s no credible justification for the federal government subsidizing California’s highest-in-the-nation state income tax — or, for that matter, any local levy like the property tax.

 

Why should federal tax money from people in other states be spent on partially rebating Californians for their state and local tax payments? Some of those states don’t even have their own income tax, including Nevada and Washington. Neither do Texas and Florida.

 

The federal subsidies just encourage the high-tax states to rake in more money and spend it. And they numb the states’ taxpayers.

 

Former California Gov. Ronald Reagan tried to dump the state and local tax deductions after he became president.

 

“I don’t believe that we can justify a system that forces taxpayers in low-tax states to subsidize the big-spending policies of a few high-tax states,” Reagan said.

 

During the recession in 2008, for example, a 3.7% dip in the California economy resulted in a 23% nosedive in state revenue.

 

The revenue stream has become unreliable because it depends too heavily on high-income earners, especially their capital gains. During an economic downturn, capital gains go bust and revenue slows to a trickle.

 

In 2015, the top 1% of California earners paid about 48% of the total state income tax while drawing 24% of the taxable income.

 

California has shifted from a predominately manufacturing to a service economy over the decades. We tax retail sales, but still not services. And the sales tax has tailed off. In 1950, it supplied 60% of state general fund revenue. Today, it’s less than 20%. The income tax in 1950 filled just 10% of the general fund. Today it’s 70%.

 

So we should lower both the income and sales tax rates and start taxing some services. Such services as auto repairs, legal advice, architecture and Dodgers tickets. And political consulting.

 

There’d certainly be loud wailing from special interests. And legislators mostly are cowards.

 

But Hertzberg thinks Trump has provided some cover for lawmakers to finally act. If the president’s plan passes, he says, “people won’t be able to still say: ‘These taxes aren’t so bad. They’re deductible.’ Now the politics changes.”

 

Hertzberg adds: “We’ve got to solve this volatility problem. How many years have we talked about this?”

 

Trump’s plan may be the best thing that ever happened for California’s rickety tax system.

 

 

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