Tax reform plan in Congress will make California more globally competitive
The U.S. House of Representatives approved a desperately needed overhaul of the federal tax code two weeks ago and the Senate will vote on its version this week. Many California officials have been critical of the effort, including some prominent Republicans. Critics’ main point of contention is that scrapping the state and local tax deduction, which is a key feature of both the House and Senate versions of tax reform, will disproportionately harm California.
Not only is this criticism wrong, the conventional wisdom it’s based on has it backwards. Americans who live in high income tax states like California will actually be among the biggest winners from tax reform that, as the pending federal legislation does, ends the SALT deduction and does so in order to facilitate broad-based rate reduction that provides tax relief to households of all income levels.
This criticism of SALT’s repeal is misdirected. For it is the swamp in Sacramento, not the one in Washington, where complaints about how costly the Golden State is should be directed. The federal government, especially a federal government that is $20 trillion in debt, has no business subsidizing the high-spending, high-tax ways of bloated state governments like those in New York, New Jersey, Illinois and California. Same goes for the cities of Chicago, New York, Los Angeles and San Francisco.
Repeal of SALT in exchange for lower income tax rates is a great deal for California
The SALT deduction, which most taxpayers don’t benefit from because approximately 70 percent of Americans do not even itemize, is a federal subsidy that drives state and local taxes higher than they otherwise would be. Its repeal will benefit California taxpayers in particular, since they contend with one of the highest state tax burdens in the nation, by eliminating the current bias against state and local tax reduction.