Why State Tax Deduction Will Stand

Articles and accounts about the possibility of federal tax reform typically conclude with this: Californians appear poised to get thumped. More than anyone else in the country. Indeed, if you’ve read such accounts about looming tax changes, you probably sighed and sorrowfully agreed that it seems logical, inevitable, close to absolute certitude that Californians, and particularly wealthier ones, are going to pony up much more moola to the Feds on April 15. But wait. I’m here to give you hope. Maybe you need not worry about your ballooning future federal tax bill. That’s because it’s hard to see how the California-hurting tax reform can pass. More about that in a minute. First, the background: As you know, taxes you pay to the state of California get deducted from your federal taxes. If you pay, say, $10,000 in state taxes, that $10,000 isn’t taxed by the Internal Revenue Service. It has been that way since the get-go. Otherwise, it would be double taxation. But the Trump Administration says that situation is unfair. It questions why taxpayers in fiscally prudent, low-tax states should be forced to pay more to support the federal weal than their counterparts in profligate, high-tax states. Analogy: Would an apartment landlord charge lower rent to the few tenants who have high car payments? Californians are the biggest beneficiary of the state tax deduction, by far. Close to 20 percent of all state tax deductions in the country come from California, according to the Tax Foundation. That’s because the state has the most people at the highest state income tax rate – more than 13 percent at the top. Of course, the higher your income, the more valuable that deduction becomes. (So I’m assuming since you’re reading the Business Journal, and since you’ve read this far, you are among the most exposed to the possibility of pain from this iteration of tax reform.) The prevailing political logic is this: Republicans control Washington and the high-tax states tend to be blue states – California, New York, Connecticut, etc. – so it seems all but inevitable that Republicans will kill the state tax deduction. After all, they can call it the elimination of a loophole and quickly raise more than $100 billion a year. “What’s this?” Republicans can ask over any objections. “Democrats now oppose raising taxes on the wealthy?” But I’m skeptical this brand of tax reform will happen. Why? For one thing, there are something like 80 Republican members of Congress in blue states. If just half of those representatives don’t go along – and assuming the Democrats hold together – the math suggests the whole kill-the-state-tax-deduction question gets thrown into 50-50 territory. What’s more, killing the state tax deduction means killing not only income tax deductions but similar deductions for property taxes paid to the state. That will deliver a big wallop in Texas, the second-biggest state, where there’s no income tax but very high property taxes. Texans looking at killing the state tax deduction, at least in the reform that’s currently envisioned, are likely to shout, “Ouch, y’all!” and they may well turn against it. And finally, tax reform ultimately depends on the probability of Republicans actually passing anything meaningful. And, well, gee, we don’t need to dwell on this. (Did somebody say, “Repeal Obamacare”?) I suspect that it’s far more likely that the Trump Administration will use the threat of killing the state tax deduction to negotiate something else. But in the end, the state tax deduction will stand. There’s lots to worry about – North Korea, the state of Kathy Griffin’s mind – but killing the state tax deduction shouldn’t be one of them. • • • An American Express-sponsored survey that came out last week once again highlights something I’ve noticed for years: entrepreneurs are the happiest people around. The annual survey said 78 percent of California small-business owners reported that their happiness is due somewhat or entirely to being an entrepreneur. That doesn’t surprise me. Entrepreneurs, when you meet them, seem to smile the most and laugh the first. They appear content and utterly pleased, for the most part. That doesn’t mean they’re not stressed; many work ungodly hours and feel responsible for everything – from the overarching strategic vision right down to the clogged sink in the restroom. But there’s something deeply satisfying about working the way you want and when you prefer. Life can be miserable when you are subject to a controlling boss, like the soul-deadening way the character Bill Lumbergh in the movie “Office Space” casually informed his charges on Friday afternoon to report to work at 9 o’clock Saturday morning. (“Oh, I almost forgot. I’m gonna need you to go ahead and come in on Sunday, too.”) Now lots of surveys ask workers about job satisfaction, which is different from happiness, but even so, it’s difficult coming up with many professions that can match that 78 percent level. One survey a few years ago, for example, said only 13 percent of engineers reported being “completely content” in their jobs. (Although that may be an unfair selection; engineers, it seems to me, can be a cranky lot.) By the way, the survey, called the American Express Open Small Business Monitor, implied that confidence in the regional economy appears to be on the upswing. At least, it reported that 65 percent of California small business owners had a positive view of their business prospects over the next six months, up from last year’s 58 percent. One more thing: Nearly one-third (32 percent) of California small business owners say they come up with their best ideas during their down time. Again, that’s not a surprise. But it is a good reminder that relaxing weekends and restorative summer vacations can be an immense benefit to your work. Not to mention your family. Charles Crumpley is editor and publisher of the Business Journal. He can be reached at [email protected].