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1 Jared Walczak, California's SALT Deduction Cap Workaround Is Legally Dubious and Needlessly Regressive 1 (2018)

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          California's SALT Deduction Cap Workaround

          Is  Legally Dubious and Needlessly Regressive

                  Written Testimony for the California Assembly
                  Committee on Revenue and Taxation on SB 227

                                       Jared Walczak
                           Senior Policy Analyst, Tax Foundation

                                       June  25, 2018

Chairwoman  Burke and Members of the Committee:

Senate Bill 227 has gone through multiple iterations since its introduction, but from the initial language
to the substitute before you, the bill's basic intention has remained constant: to provide a credit against
state income tax liability for contributions to government-linked funds, with the intent of allowing high-
income taxpayers to recharacterize their tax payments as charitable contributions to reduce tax liability
under the new federal tax law.

The federal Tax Cuts and Jobs Act caps the state and local tax deduction at $10,000 as part of the offset
for rate reductions. Senate Bill 227 is designed to allow taxpayers to retain the effect of the uncapped
deduction by reclassifying tax payments as charitable contributions. There are two primary objections to
this approach: first, that it is legally dubious and could leave taxpayers worse off; and second, that it is a
regressive policy which doubles down on tax reductions for some of the highest-income earners in the
country.

Let me take those in reverse order.

Our analysis at the Tax Foundation agrees with that of groups across the ideological spectrum, groups
like the Tax Policy Center and the Institute on Taxation and Economic Policy: under the new federal law,
most California taxpayers will see a tax cut, and often a significant one. This is true for low- and high-
income taxpayers alike, and it's true in every single congressional district in the state.

Taxpayers with incomes above $200,000 would be the primary beneficiaries of this proposed
workaround to the state and local tax deduction cap. We looked at how they fare under federal tax
reform in every congressional district in the country (https://tax.foundation/2tD54iL). In California, this
class of taxpayers sees its after-tax income rise by 4.1 percent on average.

It's important to understand what this means. Imagine, for simplicity's sake, that you had $200,000 in
taxable income and paid $40,000 in federal taxes, for an effective tax rate of 20 percent and an after-tax
income of $160,000. A 4.1 percentage point increase in after-tax income for this taxpayer represents a
tax cut of $6,560-a reduction in tax liability of more than 16 percent!


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