BEYOND THE NUMBERS
California House Members May Settle for Bad SALT “Compromise”
Update, December 14, 2017: This post has been revised.
Republican House members from California are reportedly pushing to change a provision in the emerging GOP tax bill that eliminates much of the state and local tax (SALT) deduction, which lets taxpayers deduct state and local property taxes and either state and local income taxes or general sales taxes. But the reported change would do little to alter the impact on California, new estimates from the Institute for Taxation and Economic Policy (ITEP) show. The number of California taxpayers that would face a tax hike would fall only slightly, from 2.36 million to 2.14 million (see chart).
Nationally, the change would still leave 12.6 million taxpayers with a tax hike in 2019, ITEP estimates.
The House- and Senate-passed tax bills would end the SALT deduction for income or sales taxes and cap the property tax deduction at $10,000. As we’ve written, sharply limiting the SALT deduction to pay for tax rate cuts that are heavily tilted to the rich would be a bad deal for most Americans. It would hurt many states — especially California, where the state income tax deduction is particularly important to taxpayers and thus to the state’s ability to raise revenue to fund public services.
House Republicans from California have said that addressing this problem is their priority as a House-Senate conference committee irons out a final tax bill. But they would reportedly settle for letting taxpayers deduct up to $10,000 in property taxes or up to $10,000 in state and local income or sales taxes. For example, a taxpayer who paid $6,000 in state income taxes and $4,000 in property taxes could deduct $6,000, versus $4,000 under the current House and Senate bills.
But even after that change, the bill would raise taxes for a significant number of Californians — 2.14 million, compared to 2.36 million under the Senate bill.
Thus, even with the change, the bill would disproportionately hurt California. Californians would pay a larger share of the country’s federal income taxes than they do now. Under current law, they would pay about 16 percent of all federal personal income taxes in 2019. Under the Senate bill, however, they would get just 7.6 percent of the personal income tax cuts that year — less than half their share. If California Republicans get their desired SALT change, that figure would rise only slightly, with Californians getting just 8 percent of the personal income tax cuts in 2019. At the same time, Texas and Florida would see their shares of income taxes decline under the bill.
Because the change would have so little impact on taxpayers, it would do little to reduce the tax bill’s harmful effects on California’s ability to support its schools and other public services. As we’ve written, eliminating the state income tax deduction would make it harder over time for states to raise revenue to pay for schools and other services: without the deduction, higher-income taxpayers would be less willing to pay state income taxes — a major source of state revenues. Capping the income tax deduction wouldn’t be much better, since filers already paying over $10,000 would get no additional deduction and therefore would pay the full amount of any future tax increase.
Congressional leaders may also be considering letting taxpayers deduct up to $10,000 in all state and local taxes combined. That is, a taxpayer who paid $6,000 in state income taxes and $4,000 in property taxes could deduct $10,000. That would be costly — raising the bill’s cost by about $8.8 billion in 2019 alone, ITEP estimates — so the conference committee won’t likely include such a provision in its final bill. But even so, it wouldn’t do much for California or other states. Some 1.9 million California taxpayers would still face a tax increase; Californians would still pay a larger share of federal taxes than they do today; and California would still be less able to raise revenues for important public services.