California’s Political Charity

Democrats propose a gimmick to help the rich avoid federal taxes.

 
 

California State Senate President Kevin de Leon in Los Angeles, Dec. 20, 2017.
California State Senate President Kevin de Leon in Los Angeles, Dec. 20, 2017. PHOTO: DAMIAN DOVARGANES/ASSOCIATED PRESS
 

Much has changed in Donald Trump’s first year as President, including some progressive principles. Lo, California Democrats in 2016 campaigned to extend a tax hike on the rich. Now they’re promoting a gimmick to help reduce their wealthy residents’ tax burden.

State Senate President Kevin de Leon, who is challenging U.S. Senator Dianne Feinstein in the June primary, complained last week that the new GOP tax law “offers corporations and hedge fund managers massive tax breaks and expects California taxpayers to pick up the costs.” It’s the “worst tax policy in the history of this country. Perhaps the world.”

In fact, some California taxpayers are among the law’s biggest beneficiaries—to wit, Silicon Valley titans such as Apple, Facebook and Google. California tech companies are sitting on more than $500 billion in cash overseas, which they will now be able to repatriate at a discounted tax rate. 

But speaking of bad tax policies, Mr. de Leon has proposed legislation to help high earners avoid the new $10,000 state-and-local tax deduction limit. Taxpayers would receive a dollar-for-dollar tax credit for contributions to a new California Excellence Fund, which they could then deduct as charity. Taxpayers can deduct up to 60% of their income for charitable contributions under the new federal reform.

The Senate leader cites as his model private-school scholarship tax-credit programs in other states that function like vouchers. However, these charitable contributions help nonprofits or parents who want to send children to private schools. Mr. de Leon’s “excellence fund” would exist within the General Fund, and donations would be appropriated by the legislature. The only beneficiaries of this “charity” would be the donating taxpayer—and politicians.

In other words, Democrats in Sacramento want to help the rich dodge federal taxes. According to IRS data, California’s 71,000 taxpayers with million-dollar incomes deducted on average $462,500 in 2015 compared to $6,940 for individuals making between $50,000 and $100,000. Few California middle-class taxpayers will be harmed by the $10,000 deduction cap since the standard deduction has doubled to $12,000.

Neither the IRS nor federal courts are likely to allow this charity dodge. The IRS disallows deductions for charitable contributions to the extent that a taxpayer benefits—for example, paying $10,000 at a charity auction for an artwork valued at $8,000 would only yield a $2,000 deduction. In 1989 the Supreme Court ruled that contributions “made to such recipients with some expectation of a quid pro quo” are not deductible.

The one reform Mr. de Leon isn’t proposing is a cut in California’s top marginal tax rate of 13.3%, including the three percentage-point increase that Democrats pushed in a 2012 referendum. Rates on individuals making more than $250,000 also increased. Democrats successfully pushed to extend the tax hikes through 2030 in November 2016. The federal GOP tax reform means that the effective top state and federal combined marginal rate for Californians increases by 2.7-percentage points in 2018—to 50.3% from 47.6%.

Revenues are soaring due to strong income and capital-gains growth. Gov. Jerry Brown on Wednesday proposed a $132 billion budget that forecasts a $6 billion surplus. While the Governor wants to add some revenue to the state’s $8 billion rainy day fund, this will quickly vanish in the next recession—unless Democrats raid it first after he leaves office. State tax revenues fell cumulatively by more than $70 billion following each of the past two recessions.

California’s steeply progressive tax code has encouraged a boom-bust revenue and spending cycle. Reducing taxes on high earners would impose spending discipline and ameliorate the effects of the limitation of the state-and-local tax deduction. Alas, Democrats in Sacramento seem mainly interested in boosting their favorite charity—themselves.

 

Appeared in the January 13, 2018, print edition.

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