Democrats: Rushed federal overhaul ominous for state
Congress is poised to pass legislation that would constitute the most sweeping revision to federal tax policy in more than a quarter of a century. With nearly 18 million taxpayers and a $2.6 trillion economy that alone would be the world’s sixth largest, how would California fare?
Sadly, we can’t say with certainty. That’s because in its haste to meet a self-imposed year-end deadline, a joint congressional committee charged with reconciling different versions of the measure will be making last-minute amendments and hastily drafted changes with multibillion-dollar implications — for California taxpayers and for California’s economy. While we can’t yet determine the effect of these changes,
what we do know is ominous for most Californians and doesn’t help middle-class taxpayers.
Both the House and Senate versions of the bill would prevent 1 out of every 3 California tax filers — more than 6 million — from deducting state and local taxes. While allowing up to a $10,000 deduction on property taxes provides some offset, property taxes paid make up a relatively small portion, about 25 percent, of the total state and local tax deduction for California taxpayers. The state and local income tax deduction benefits more than one-third of California taxpayers with an average deduction of $16,000, whereas the property-taxes-paid deduction benefits only one-quarter of California taxpayers and with an average deduction of less than $6,000 per return.
Under the Senate bill, deducting property damage costs caused by wildfires and other disasters would be repealed beginning in 2018. October’s devastating wildfires in Northern California caused enormous losses — with more than 10,000 homes damaged and nearly 5,000 destroyed — and now we are in the midst of another rapidly spreading and destructive set of wildfires in Southern California. Denying fire victims a way to deduct these losses on their taxes would make it harder for families and communities to recover and rebuild from natural disasters — yet another example of how this sweeping change would financially harm thousands across the state.
On paper, the tax plan includes some temporary tax reductions for working people, but these provisions expire in 10 years. Meanwhile, the corporate tax credits continue forever. This is another example of how thinly veiled policies would boost corporations at the expense of working families. Similarly, the House’s move to restrict mortgage-interest deductions would make it even harder for families to buy homes or afford to continue living in them. If owning a home is part of the American Dream, then this plan would push that dream further out of reach.
Job creation would be slowed and infrastructure investment would be reduced under the House bill’s proposal to eliminate the interest exclusion for currently tax-exempt private activity bonds, often used on behalf of local governments to finance schools, research institutes, charities and other eligible projects with public benefit. Scaling back this important financing tool, which the state’s Infrastructure Bank used last year to issue more than $300 million in bonds, would weaken our ability to invest in the infrastructure that strengthens the economy and creates jobs. Even worse, this plan hurts the state’s veterans by ending bond issuances that help veterans buy homes when they cannot qualify for private financing.
While these measures would cut out key benefits in the short run, it would also drive up the nation’s deficit by well more than $1 trillion — on top of our existing $20 trillion national debt. This is a risky proposition, particularly when we know that a downturn in the economy will happen eventually. That’s why the governor and the Legislature have worked to pay down the state’s “wall of debt” — which stood at nearly $35 billion just seven years ago — to one-fifth of that amount today. We also eliminated a $26 billion budget problem over the same period and took the state’s Rainy Day Fund from empty to $8.5 billion. Neither of the competing measures in Congress includes anything like this to prepare for the next economic downturn.
The increase in the federal deficit under these proposals would probably cause spending cuts down the road, further hurting California. In short, this amounts to a huge and permanent tax cut for corporations and the wealthiest Americans with benefits to working families that expire in just 10 years — the same time that the nation’s debt will balloon even further.
These are just a handful of known changes that would affect California under this measure. With all that is at stake, as Gov. Jerry Brown has correctly cautioned, this is a measure that should be delayed and debated in a way to fully understand its farreaching and potentially damaging implications. Rushing to meet an arbitrary deadline does a disservice to the millions of California taxpayers who stand to be hurt.