The Republican plan to overhaul US taxes doesn’t look good for California.
As Los Angeles Times Jim Puzzanghera pointed out recently, California is already one of a handful of states that pays more to the federal government than it receives. The Republican plan currently being debated in the Senate is likely to make this imbalance even larger. While most of the country can expect to benefit from paying $80 billion less in national income taxes under the proposed plan, an estimate from the left-leaning Institute on Taxation and Economic Policy finds that by 2027, Californians will pay $12 billion more. New York, New Jersey, and Maryland are also projected to pay more.
California is a center of economic dynamism for the US and a leader in creating jobs (paywall) and billion dollar companies. Taking resources out of the state, and moving it to less economically efficient places, could stifle overall US growth.
There are two big changes in the Republican proposal that will bump up Californian’s income taxes.
First, the plan would get rid of the state and local tax deduction. Today, Americans who itemize their taxes instead of using a standard deduction only pay federal taxes on their income after local taxes have been deducted. Under the new tax law, they would have to pay federal taxes on the entire amount. This is a big deal for Californians, because an unusually large number itemize their taxes (34% in 2014), and California has high local taxes. As a result, Californians receive around 20% of the national benefit from this deduction.
Secondly, the plan aims to lower the cap on the mortgage interest deduction. Currently, households that itemize their tax returns can deduct the interest they paid on up to $1 million of mortgage debt. That would decrease to $500,000 under the new law. That change would hit California particularly hard because of its high housing costs and large number of wealthy residents. Puzzanghera shows that 2.4% of California’s tax payers would see a hike due to this reform, more than any other state.
According to the Rockefeller Institute of Government (pdf), a nonpartisan public policy research center, Californians received only $0.96 in federal spending for every $1 they paid in federal taxes in 2015. The average state receives $1.28 per $1 paid. This discrepancy is mostly for good reasons—Californians are comparatively young and rich, and so less likely to take advantage of welfare programs like social security. There is certainly an argument that the state should subsidize the rest of the country even more than it already does. But it might come at the cost of the US overall economic health.