As we weigh the impact of the federal tax overhaul being wrought by President Trump and the Republican Congress on California, we should keep in mind the first and foremost axiom about taxation.
What and who are taxed and how much are purely arbitrary decisions that are completely divorced from logic, consistency or even rudimentary fairness.
Tax decisions are driven by ideological biases, special-interest influence, political expediency and momentary passions. And those who are newly taxed usually complain loudly – until, of course, they have the opportunity to shift levies to someone else.
The American Revolution was sparked by arbitrary taxes on imported goods – i.e., tea – imposed on politically powerless colonists by a distant British king and Parliament to pay for their continental wars.
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The new nation soon faced a “whiskey rebellion” in frontier communities over taxes imposed on their home-distilled whiskey. President George Washington sent troops into western Pennsylvania to quell the revolt. California saw a tax rebellion of its own four decades ago over increases in local property taxes. Voters overwhelmingly passed Proposition 13, which capped tax increases and made it more difficult to enact replacement increases in sales and income taxes.
The new federal tax overhaul sharply reduces corporate income tax rates – aimed at stimulating job-creating investment, advocates say – and partially pays for it by reconfiguring personal income taxes to generate new revenue.
It’s certainly not the tax simplification that was promised. In many respects, it makes federal tax law even more complex. And it has particularly pointed effects on California and other states with high state and local taxes, hence the wailing coming from those states. Gov. Jerry Brown likened Congress to the Mafia.
The federal tax bill limits deductions for mortgage interest and state and local taxes (SALT), which hits those in upper-middle and upper economic classes the hardest as they are most likely to hit those limits.
California’s leaders, and those of other high-tax states, say that’s unfair and smacks of arbitrary punishment for blue states. They might be right about the political motives.
What worries them the most – though unspoken – is that they are losing indirect federal subsidies for those high state and local taxes; so high-income taxpayers will now feel the full impact of those state taxes.
Despite a small reduction in federal tax rates, those losing their SALT deductions might move to lower-taxing states, or change investment strategies to minimize taxable capital gains.
California is particularly vulnerable because its state income tax rates are the nation’s highest and its state budget is inordinately dependent on revenue from a relative few high-income taxpayers. Nevada, which has no income tax, is just next door.
With the nation’s highest housing prices, the new limit on mortgage interest deductions will make buying homes with mortgages over $750,000 more costly.
For the umpteenth time, a coalition of liberal groups is proposing to modify Proposition 13 by removing its limits on taxing commercial property. If successful, it would be a counter-rebellion, reinforcing California’s reputation for blue politics and high taxation with yet another arbitrary change in tax policy.
Dan Walters writes on matters of statewide significance for CALmatters, a public-interest journalism venture. Go to calmatters.org/commentary.