GOP Tax Proposal Could Put High-Tax California At A Disadvantage

The tax overhaul proposed by Republican leaders in Washington could add more weight to California’s already-top-heavy tax structure.

The proposal calls for eliminating most itemized deductions, and while there are few details, lawmakers are operating as though that includes a deduction for state and local income taxes.

The Tax Policy Center estimates 80 percent of those claiming the deductions earn over $100,000 annually.

Opponents of the deduction call it a regressive tax incentive for the wealthy. But it’s also predominantly taken advantage of by taxpayers in blue states—where state and local income taxes are higher, particularly New York and California.

Loyola Law School tax professor Katharine Pratt says states with low or no income tax will see little effect.

“It disadvantages the state of California," Pratt says. "It increases the cost of the California income tax, and it puts pressure on the state Legislature to reduce the income tax rate."

Without the federal deduction, wealthy Californians—who already pay some of the nation’s highest state income taxes—will pay even more.

The conservative Tax Foundation estimates California receives a fifth of the roughly $100 billion in claims each year.

The Tax Policy Center has estimated that eliminating the write-off would raise the average claimants tax by $3,200.

In a statement, Democratic Senate Leader Kevin de León called the proposed removal a “direct hit to the pocket books of hardworking California taxpayers.”

He said it “will ultimately result in reduced funding available for infrastructure spending, and cause possible cuts to local services and vital state and local programs.”

It "could more accurately be seen as an incentive to high-tax states like California to lower its state tax burden to remain competitive with other states like Nevada, Florida and Texas,” Republican Senator Jeff Stone said in a statement.

UCLA tax law professor Eric Zolt agrees ending the deduction would pressure state governments to reduce their taxes, but he notes the effect would vary on individual taxpayers, since the overhaul calls for doubling the standard deduction—meaning less people would itemize to claim the state and local income tax deductions. And, the Alternative Minimum Tax—which currently negates state and local income tax deductions—would also be eliminated.

“The details matter and individual tax situations matter,” says Zolt. “The loss of the local and state tax deduction would be mitigated a lot by the repeal of the Alternative Minimum Tax. And for many taxpayers, doubling the standard deduction will mean that it’s not that important.”