California Looks at Republican Tax Measures and Sees Payback
Strongly Democratic, the state would be hit hard by the loss or scaling back of widely used deductions, and the governor sees “something very odd.”
SAN FRANCISCO — The tax plan hurtling through Congress is a fast-moving blur of cuts and increases designed to keep Republicans on track to pass a bill without Democratic votes. But here in California, where several prized deductions are at risk of being eliminated, people suspect there is a greater design at play.
“It really does feel like they said, ‘What can we do to California?’” said Sam Moss, executive director of Mission Housing, an affordable-housing developer in San Francisco.
Mr. Moss is worried about the threat to an array of tax credits and tax-exempt bonds that are widely used to build low-cost housing in a state with a severe housing shortage.
And it’s not only the housing incentives. The tax bills are filled with measures that Democrats, and some Republicans, say would have a disproportionate and damaging impact on an overwhelmingly Democratic state that has portrayed itself as the center of resistance to President Trump.
In the sharpest example, state officials estimated that over six million California taxpayers — one of every three — take a deduction for state and local taxes. That is one of the main deductions Republicans are moving to eliminate or severely restrict. The bills would also put a ceiling on a deduction for mortgage interest used by more than four million California taxpayers, according to the State Department of Finance.
The bills would phase out the ability to deduct personal casualty losses from wildfires and earthquakes — a constant threat in vast parts of the state — but keep the deduction for damage from hurricanes and floods like those in Florida and Texas this year.
“I would like to think that this isn’t directly aimed at California, but it’s hard not to think that Congress has their sights set on the Golden State,” said State Senator Mike McGuire, a Democrat whose district includes areas ravaged by the recent wildfires in the north. “No matter if it’s an earthquake, a wildfire or a hurricane, families should be able to deduct the damage.”
California is overwhelmingly Democratic. Hillary Clinton outpolled Mr. Trump by nearly four million votes here, and Democrats control both houses of the Legislature. Party leaders have been at the forefront of denouncing Mr. Trump’s policies on issues from the environment to health care.
There has long been concern here that the state’s confrontational stance toward the Trump administration could invite retribution from Washington.
Gov. Jerry Brown, a Democrat, said in an interview that the rush by Republicans to pass a bill made it impossible to judge how much the legislation could hurt the state.
“I can’t penetrate the inner motivations of the Republican leadership,” Mr. Brown said. “But I will say there is something very odd about their rushing this very gigantic tax proposal through Congress without serious transparency or debate. They are doing so primarily, it seems, to reward their corporate donors.”
“I don’t like this way to govern in a democracy,” he said.
Representative Darrell Issa, whose San Diego County district is among the most vulnerable Republican seats in the state, said he would oppose the bill.
“I cannot endorse changes that may make the tremendous burden felt by California taxpayers even worse,” he said. “Tax reform should lower taxes for all taxpayers — regardless of where they live.”
But so far, Mr. Issa’s opposition appears singular within the state’s Republican delegation, at least among those who will offer comment. Representative Kevin McCarthy, the majority leader, who represents a Central Valley district, strongly backed the effort. He said other parts of the bill — such as increasing the standard deduction and eliminating the alternative minimum tax — would help California taxpayers who were, he said, saddled with high state taxes.
State Senator Jeff Stone, a Republican, also endorsed the effort, saying it would bring welcome relief to California taxpayers.
“The Democrats keep raising taxes in California,” he said. “It’s about time the federal government stops letting them off the hook by giving them cover with an overly complicated federal tax system.”
On the Democratic side, Anthony Rendon, the Assembly speaker, called the bill “anti-California,” and said he was surprised that so few California Republicans had spoken against it, especially in contrast to Republicans in other states, like New York, that would also be hurt.
“It’s to a large extent political suicide for a lot of these folks,” he said, “and they don’t seem to care.”
Like everything in the tax measure, affordable-housing credits are a moving target. The House version eliminated a lot of things, and the Senate version restored some of them. But as Republican legislators shape a bill that delivers a big cut in corporate taxes while remaining within deficit limits that allow a party-line vote, the houses have consistently looked at reducing credits and deductions whose ripple effects would be minimal in most of the country but profound for taxpayers who live, generally, in Democratic states.
For instance, both the House and Senate bills either reduce or repeal the deduction for state income, sales and property taxes. California’s top personal income-tax rate is the nation’s highest.
The House bill lowered the limit on the mortgage-interest deduction for new home purchases from $1 million in debt to $500,000. That move would affect fewer than 3 percent of mortgage holders nationally, and there are only four metropolitan areas in the United States where more than half of the homes are priced above $500,000. All four are in California. (The Senate bill keeps the limit at $1 million.)
Also, no state benefits more from itemized deductions, which the bills limit, and in many cases discourage, by increasing the standard deduction. Economic models suggest that the bulk of the millions of families that would face tax increases under the legislation itemize their deductions.
More than a third of Californians itemize their deductions, according to data compiled by the Pew Charitable Trusts; the average benefit from those deductions was nearly $37,000 in 2015.
California is not the only state whose voters would lose deductions from the tax bill. According to an analysis by the Tax Foundation, an independent think tank, six states — California, New York, New Jersey, Illinois, Texas and Pennsylvania — claim more than half of the total amount deducted for state and local taxes.