Federal Tax Reform Has Helped, Not Hurt, Californians

COMMENTARY Taxes

Federal Tax Reform Has Helped, Not Hurt, Californians

May 23rd, 2019 2 min read
COMMENTARY BY
Adam Michel

Senior Policy Analyst, Grover M. Hermann Center

Adam N. Michel focuses on tax policy and the federal budget as a Senior Policy Analyst in the Grover M. Hermann Center.
In the case of high-income California taxpayers, their state tax deduction reduced their overall federal tax bill by 40 percent. Denise Taylor/Getty Images

Key Takeaways

The average family of four got to keep $2,500 more of their hard-earned money.

The vast majority of taxpayers in every single California congressional district received a tax cut according to a Heritage Foundation analysis using IRS data.

The new federal tax code cut taxes for most Californians and flipped the incentives in Sacramento so that taxpayers have a louder voice.

More Californians got a federal tax cut last year than did taxpayers in 20 other states. The average family of four got to keep $2,500 more of their hard-earned money. In fact, most taxpayers nationwide got a tax cut. The cap on state and local tax (SALT) deductions did not change that.

Across America’s blue states, Republicans and Democrats have been peddling the falsehood that people who live in high-tax states got screwed by Trump’s tax cuts. The data don’t bear that out.

The vast majority of taxpayers in every single California congressional district received a tax cut according to a Heritage Foundation analysis using IRS data. The average Californian received a 10 percent cut in their federal income taxes, and three of the top five districts with the biggest tax cuts are in California.

Average tax cuts were $500 greater than the national average in the two prominent Orange County congressional districts that flipped from red to blue in the 2018 mid-term elections. A family of four got a $3,500 tax cut on average in the 49th district, represented by Mike Levin. The average taxpayer got a $1,900 tax cut. The cuts are almost identical in the 28th district, represented by Harley Rouda.

But most people don’t think they are “average.” Lots of people have been led to believe that they were hurt by the tax law’s new $10,000 cap on the SALT deduction. While the new cap is indeed real, there are three good reasons why most Californians still got a tax cut, despite the SALT cap.

First, the tax law doubled the standard deduction, which means that about half of the people who previously chose to itemize their taxes (which allows access the SALT write-off) now choose voluntarily to take the new larger standard deduction. Most of these people are better off than they were before.

Second, tax rates were lowered across the board. Even if taxable income increased slightly because of the SALT cap, lower tax rates mean most people still came out ahead.

Lastly, because the tax law raised the exemption for the ineffective and overly complicated alternative minimum tax (AMT), millions of higher-income AMT paying taxpayers saw the SALT deduction increase from zero to $10,000 under the new law.

It is true, however, that a small fraction of higher-income Californians paid higher taxes last year. But this is not because the federal tax system is somehow tilted against California. It’s because the old federal system subsidized California’s state taxes, which are too high. Blame Sacramento, not Washington.

The SALT cap moves the federal tax code toward the bipartisan goal of fairness and equity between taxpayers of similar incomes. Before the tax cuts, California’s high taxes were partially subsidized by other federal taxpayers. In the case of high-income California taxpayers, their state tax deduction reduced their overall federal tax bill by 40 percent.

That means that when California raised the state’s highest-in-the-country top marginal income tax rate to 13.3 percent, high-income taxpayers in California only had to pay 60 cents for every dollar of additional California tax revenue when it came time to file their federal taxes. Washington, D.C. was subsidizing bad state tax policy.

Legislators in Sacramento became reliant on Washington’s subsidy for their out-of-control state tax system. The federal tax code used to allow taxpayers with identical incomes to pay hundreds, thousands, and even hundreds of thousands of dollars more or less in federal taxes, strictly based on their state of residency. That certainly isn’t fair.

Sacramento has been put on notice. Last year 16 states cut taxes, almost all in response to the federal tax cuts, according to the American Legislative Exchange Council.

The new federal tax code cut taxes for most Californians and flipped the incentives in Sacramento so that taxpayers have a louder voice when telling state legislators to rein in state spending and cut taxes.

This piece first appeared in The Orange County Register