With congressional Republicans racing to rewrite the federal tax code, bypassing the usual scrutiny for such a monumental undertaking, there probably will be some unexpected surprises in the final product.
There’s no surprise about this: Millions of Californians, including middle-class families, will be stuck with higher tax bills.
We already commented on the indefensible decision to do away with the personal income tax deduction for losses suffered in wildfires but not floods or hurricanes.
But, as they say on the late-night TV ads, there’s more.
To offset some of the cost of taxes cuts for corporations and the wealthiest Americans, the House GOP plan eliminates the interest deduction on mortgages over $500,000, caps the property-tax deduction at $10,000 and jettisons the deduction on other state and local taxes. The Senate bill retains the mortgage deduction but wipes out the property tax deduction as well as the deductions for state and local taxes.
In 2015, according to figures put out by Sen. Dianne Feinstein, almost 6 million California taxpayers — about one in three — deducted state and local tax payments totaling about $80 billion from their federal income taxes. That includes 90,450 taxpayers in Sonoma County, who deducted an average of $15,430 each.
Republicans used to argue, credibly, that taxing income already paid in taxes amounted to double taxation. Now, they justify their proposal by saying residents of California and other high-tax states are “subsidized” by residents of states with low or no income taxes.
That ignores, among other things, the fact that most of those low-tax states receive more in federal revenue than they pay in federal taxes, courtesy of the residents of California, New York and other wealthy states with higher tax rates. That is the real subsidy.
In many of those states, the proposed cap on the mortgage interest deduction would have almost no impact.
Not so in California, where the median price of a single-family home exceeded $1 million in four counties in September and topped $500,000 in 13 other counties. A $500,000 cap on the interest deduction would make it impossible for many families to buy a home, especially here in the Bay Area.
The House bill also would eliminate the deduction on tax-exempt municipal bonds, which are a major funding source for affordable housing projects, other infrastructure projects and California’s hugely successful Cal-Vet home loan program.
The federal tax code is in desperate need of reform. But this rushed effort, a product of Republican desperation for a legislative victory, any victory, stands in sharp contrast to the 1986 tax reform plan, which culminated several years of bipartisan study and included weeks of public hearings where virtually every provision was reviewed and debated.
No responsible tax plan will benefit everyone equally, but this one seems to single out California and other affluent blue states. And, unlike their colleagues in New York, most of California’s GOP members of Congress have silently acquiesced on a bill that would hurt many of their own constituents.
Moreover, even with hefty tax hikes for middle-class Americans, the House and Senate are struggling to limit the lost revenue to $1.5 trillion, the mark they must hit to pass their bill without a single Democratic vote.