PD Editorial: State lawmakers need to ease tax bill’s bite

Christmas was just four days ago, New Year’s isn’t until next week, and April 15 seems like a long ways off. Yet it’s beginning to feel a lot like tax season.

With the clocking winding down on 2017, people are lining up to pay their property taxes early. They want to lock in some final savings before a prized deduction is undercut by the new federal tax law.

Charities, meanwhile, are asking supporters to give now because there will be fewer incentives to donate once the new tax rules takes effect on Monday.

But any savings produced by early payments or year-end contributions will be short term - as is the limited tax relief offered to middle class and even affluent families.

There are some winners, most notably corporations, whose federal tax rate drops from 35 percent to 21 percent, and those who newly qualify for a hefty deduction on “pass-through” income from investments.

The GOP-sponsored law also provides tax relief for breweries and wineries - industries that help drive Sonoma County’s economy. Those too are short-term tax breaks, set to expire in just two years.

Most of the provisions that will punish California taxpayers are here to stay. Interest payments on mortgages larger than $750,000 will no longer be deductible. That may not matter to homebuyers in Kansas or Alabama, but it will in the Bay Area and other expensive real estate markets.

Deductions for property taxes and state and local taxes will be capped at $10,000 - about half of the average on itemized returns filed by California taxpayers.

There’s a hidden penalty for married couples who file joint returns, as individual taxpayers qualify for the same $10,000 deduction.

Even so, it’s a small improvement over earlier version of the tax bill that would have eliminated the deductions for state, local and property taxes entirely.

Few states, if any, will be hit harder than California by these changes.

But the Golden State may be able to ease some of the pain, and buttress itself for the next recession, whenever it comes, by overhauling its own tax code.

The state, as we’ve pointed out in the past, relies too heavily on a small slice of the population. About 1 percent of taxpayers produce half of the state’s income tax revenue. When they prosper, the state does too. When they don’t, tax revenue collapses. It’s a boom-and-bust cycle that produces large deficits at the same time in times when more people qualify for assistance from safety-net programs.

Income taxes produce about 70 percent of state general fund revenue, with 20 percent coming from sales taxes. As recently as the 1950s, it was the other way around.

When the Legislature reconvenes next week, and as the gubernatorial election heats up through the new year, expect to see a raft of tax proposals, including extending the sales tax to car repairs and other services, revisiting Proposition 13 and restructuring personal and corporate income taxes.

We’re not prepared to endorse any particular approach, though a wider sales tax base, coupled with a lower rate, deserves serious consideration as part of any state tax plan. But we are counting on the state’s policy professionals to identify changes that can ease the bite of the new federal tax law on Californians.

Recent attempts to overhaul the state tax code have come up short. Maybe the sting of the federal tax bill will create some needed momentum in 2018.