California’s Plan To Dodge Tax Reform Is A Shell Game

When the Democrats were railing against the tax cut package which was passed before Christmas, one of their major rallying cries was to say that Trump and the Republicans were “punishing blue states” by capping SALT deductions (the amount of state and local taxes you pay which may then be deducted from your federal taxes) at $10K per year. Hardest “hit” were New York and California, with their respective governors vowing to #RESIST Trump and find a way to spare their people. While this would obviously be a silly idea in progressive circles, one response might have been to ask why they don’t stop taxing their residents at such insanely high levels. Perish the thought.

True to their word, California got to work on a plan which would allow residents to avoid this pitfall and still be able to take the full SALT deduction next year. How could they do that? It’s a rather complex shell game cooked up in the state senate. If approved, it would establish a “California Excellence Fund” where residents could make a “contribution” equal to the amount of state tax they owe over the cap. In exchange, the state would give them an offsetting tax credit of an equal amount which they could then deduct on their federal taxes under the exception provided for “charitable contributions.”

But there’s nothing “charitable” about it. The so-called Excellence Fund is nothing more than a holding company inside the state treasury specifically designed to create a tax dodge. Even the LA Times editorial board looked at this scheme and advised against such a corrupt practice. (Emphasis added)

The Internal Revenue Service has blessed similar arrangements that California has used to raise money for college scholarships, and that several states use to preserve land from development or generate money for private school vouchers. But it’s one thing to offer a tax break to try to support a public project or service; it’s another to do it solely to cut Californians’ federal tax bills. Passing the De León bill would be the state’s version of setting up a shell company in the Cayman Islands in order to shelter Californians’ income.

We should also be asking how many people this SALT cap provision is really affecting. In California, the state legislature is making a point of saying that the “average” SALT deduction by Californians is nearly $18,500. But that’s only because the top earners in the Golden State are so massively wealthy that they tip the scales quite a bit. It’s worth noting that you need to earn more than $140K in California in order to owe $10K in state taxes. In New York (which we’ll get to in a moment) you need to earn $170K before you break the $10K state tax barrier. And you still get to deduct all of the state taxes up to that point, so you’re only missing out on deductions for taxes paid on income above those levels.

So, as the LA Times described it, California is trying to do the equivalent of setting up a shell company in the Cayman Islands to help those residents who are well into the six figure income range avoid paying more federal taxes in an effort to #RESIST Trump. On the opposite coast, New York State is looking at something even more novel. (Or perhaps “crazy” would be a better word.) According to the Buffalo News, Empire State Governor Andrew Cuomo is proposing a scheme where the state would simply stop hitting workers with a state income tax and instead force their employers to pay a “payroll tax.”

The basic premise of the still-evolving state plan, vaguely unveiled during Cuomo’s State of the State speech last week, is to sharply reduce the state’s reliance on income taxes that employees pay by starting a new, statewide payroll tax that employers would pay.
It’s a tricky initiative, starting with the fact that personal income taxes — $48 billion — account for 64 percent of the total taxes and fees Albany collects each year.

You don’t need a degree in accounting to see some immediate, gaping holes in this plan. First of all, if you just force the employers to cough up all that money, how do they get it back? Simple. According to Cuomo, the companies can just cut the pay of all the workers to offset the amount they would have paid in state income taxes. Yeah… that should go over swimmingly. And what about people who work for charities, hospitals, colleges and certain non-profit government agencies? Their employers don’t pay corporate income taxes to the federal government so they would be gutted by the change.

All of this scrambling is going on so that blue state politicians can show everyone how hard they are fighting to #RESIST. And while they claim to be fighting for the little guy, they’re talking about the loss of a tax deduction which would only affect a portion of the income of those with earnings at the top end of the scale. That’s roughly 18% of Californians and 16% of New Yorkers. But hey… at least they’re resisting Trump, right?

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