How Trump’s Tax Reform Impacts High Tax States

May 22, 2017 | Blog

pile of one dollar billsWith the recent announcements by the Trump administration that tax reform is on the way, one of the proposals with the newer and simplified tax plan is the elimination of various deductions in order to close some loopholes and even things out for the masses. One of these proposed eliminations is within the state and local taxes.

So who will this impact the most?  Residents of high-tax states, like California where the state income tax rate is a whopping 13.3 percent. Of course the crafty tax filers who know how to deduct their state and local income taxes will take advantage of such a high tax rate, but if this deduction is eliminated then they’ll have to look elsewhere for their tax havens. Will Republicans in California have to explain themselves to their constituents? It depends on how skilled they are at shifting the conversation toward how California is in need of an overhaul regarding the way they tax their citizens, otherwise they’ll be pinned to the new tax reform by the media.

So along with President Trump’s tax proposal and Paul Ryan’s tax-reform blueprint, both plans would compensate what the itemized deductions would’ve cost. Because only 30 percent of federal tax filers actually itemize their deductions, they would feel the impact of this change the most.

The Tax Foundation says the deduction primarily benefits high-income taxpayers and that more than 88 percent of these tax savings seem to go to those over the $100,000 income level. Additionally this deduction favors states with high tax rates. Most states with high tax rates have high property values.   One report shows that in 2014 nearly one third of the deductions total value nationwide came from California and New York.

Devin Nunes, a member of the tax-writing Ways and Means Committee says that he supports getting rid of it. He also proposes doubling the standard deduction and also adding some additional tax breaks for children.

Tom McClintock declined to comment, but in an interview with KGO radio he mentioned that eliminating the deduction might result in double taxation. By this he means that when residents are taxed by both the federal government, and the state government, and then the local government on the same income, then it’s more like triple taxation.  He believes that part of the proposal will need to be modified over time.

Republicans who reside in wealthier districts pose the biggest targets. This list includes Ken Calvert, Dana Rohrabacher, Darrell Issa, Duncan Hunter and Steve Knight.

Republicans who represent inland areas would also come under pressure because even though their constituents as a whole deduct less tax coastal residents, they still rank higher than many other states and deduct more than many other national citizens.

Just looking at 2014, when the average California local and state tax deductions ranged from $1,330 in Imperial County to a marked different in Marin County, where it was $16,956. Compare this to Missouri, where the deduction ranged between $392 to $4,593.

A $100 increase in state income taxes would cost a 35 percent-federal bracket taxpayer $65, which would then encourage local and state governments raise taxes in order to continue providing the level of services their taxpayers are accustomed to.

Democrat Mark DeSaulnier called Trump’s proposal juvenile.  He believes strongly that it’s retaliation against both California and New York because they did not vote for him, but that’s expected from the opposition party.  He believes if the plan was indeed considered a good idea, then it needs to be scrutinized by the CBO and fleshed out a bit more.


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