San Francisco Chronicle - (Sunday)
Unkindest tax cut of all for California
As predicted, the Tax Cuts and Jobs Act reduced taxes for most Americans, but California got the smallest cut of all, according to an analysis by tax expert Martin Sullivan of recently released 2018 federal tax return data.
Congress passed the Republicancrafted act in December 2017, with no Democrats voting in favor of it. It brought about sweeping changes to federal income taxes, with most starting in 2018. It cut tax rates for most people, roughly doubled the standard deduction, eliminated personal exemptions, capped the previously unlimited itemized deduction for state and local taxes at $ 10,000, doubled the tax credit for children younger than 17, reduced the alternative minimum tax, created a tax credit for many passthrough business entities and made other changes to individual and corporate taxes.
The Internal Revenue Service recently released tax return data for 2018, allowing comparisons to 2017.
Perhaps the biggest change: The percentage of taxpayers who itemized deductions dropped from 31% to 11.5% nationwide and from 35.7% to 17.7% in California. Limiting the socalled SALT deduction to $ 10,000 and doubling the standard deduction made itemizing far less fruitful for most people.
Between 2017 and 2018,
“the states with the highest average income generally got smaller tax cuts,” Sullivan wrote in an article for Tax Notes, an industry newsletter. This “in large part can be explained by the TCJA’s limit on the deduction for state and local taxes,” added Sullivan, who is chief economist for Tax Analysts, the publisher of Tax Notes.
Sullivan calculated effective tax rates by dividing income tax after credits by adjusted gross income reported on all tax returns in each state. Between 2017 and 2018, this rate fell in every state. He then ranked states by the absolute ( not percentage) change in the two rates.
Nationwide, the rate fell from 14.5% in 2017 to 13.1%, a drop of 1.4 percentage points. But the decrease ranged from a high of 2.3 percentage points in Florida to just 0.8 percentage points in California.
Of the 10 states with the largest declines, five have no
income tax ( Florida, Texas, Alaska, Wyoming, South Dakota) and two ( New Hampshire and Tennessee) only tax interest and dividends. The others were North Dakota, Indiana and Arkansas.
The 10 states with the smallest tax cuts, starting with the smallest, were California, Maryland, Connecticut, New York, Oregon, Illinois, Utah, New Jersey, North Carolina and Idaho. Many of these states rank high on lists that try to measure which states have the heaviest state and local tax burden as a percent of income.
In 2017, when there was no cap on the SALT deduction, 36% of Californians deducted state and local taxes, according to IRS data. The total amount deducted represented 8.7% of the entire state’s adjusted gross income. Nationwide, only 31% deducted state and local taxes, and the total represented 5.6% of total adjusted gross income.
The SALT deduction favors highincome individuals in hightax states, many of which lean Democratic. When Congress capped it, there was an uproar in blue states, even among some Republicans in those states.
What you didn’t hear anyone complaining about was a cut in the alternative minimum tax, which tended to hit higherincome people who took large SALT deductions or had large families.
The percentage of Californians paying alternative minimum tax fell from 5.9% in 2017 to just 0.2% in 2018. The amount they collectively paid dropped by 92%, according to IRS statistics.
Nationally, the percentage
of returns with AMT dropped from 3.3% to 0.2%, and the amount paid dropped by 90%.
California also benefited from the new “qualified business income deduction” for passthrough entities such as sole proprietorships and partnerships. Almost 2.5 million or 13.6% of California taxpayers claimed this in 2018, their average deduction was about $ 8,800. Nationally, 12% claimed this deduction, and the average was $ 8,000.
In a separate study, Sullivan analyzed which congressional districts had the highest and lowest average adjusted gross incomes in 2018 and found that Democrats represented the top 10 districts as well as the bottom 10. “Most welloff was the district of Rep. Anna G. Eshoo, DCalif., where the average AGI per tax return was $ 298,730 in 2018,” Sullivan wrote. Eshoo’s district includes Palo Alto, Atherton and Los Altos. Others in the top 10 included those represented by Nancy Pelosi of San Francisco, Ro Khanna of Santa Clara and Ted Lieu of Los Angeles.
Sullivan added that Democrats represented 45 of the 50 richest districts and 43 of the poorest 50.
He also calculated which districts had the largest tax reductions as a percentage of adjusted gross income. Half of those in the top 10 were Texas and half in Florida, and half were represented by Republicans and half by Democrats. “Those districts enjoyed all the benefits of the individual rate cuts but felt little of the impact of the $ 10,000 limitation on deductions for state and local taxes,” Sullivan wrote.
He noted that the 10 congressional districts with the smallest tax reductions were all represented by Democrats. Pelosi’s district ranked fourth from the bottom.
Sullivan also calculated which ZIP codes had the highest and lowest average adjusted gross income in 2018.
The highest was 33109 in Fisher Island near Miami ( average income $ 3,886,430). The top 10 also included 94104 in San Francisco ($ 1.95 million), 94027 in Atherton ($ 1.76 million), 94301 in Palo Alto ($ 1.26 million), and 94304 in Palo Alto ($ 1.07 million). Remember that averages
“Most welloff was the district of Rep. Anna G. Eshoo, DCalif., where the average AGI per tax return was $ 298,730 in 2018.”
Tax expert Martin Sullivan
can be swayed by a relatively small number of very large incomes.
Six of the 10 poorest ZIP codes “are located on or adjacent to college campuses for the universities of Indiana, Iowa, Minnesota. and Utah, and the state universities of Ohio and Pennsylvania. The other four are ethnic minority communities in Kansas City, Mo; St. Louis; Wounded Knee, S. D.; and Youngstown, Ohio,” he wrote.