Low SALT Deduction Also Slams California Middle Class

Pedestrians carry shopping bags through Union Square on in San Francisco, Calif., on Feb. 22, 2011. (Justin Sullivan/Getty Images)

Commentary

As Congress continues to debate the SALT deduction and its effect on rich people, never discussed is how it also slams California’s middle class. SALT stands for “state and local taxes.” In 2017, then President Trump’s tax reform limited it to just $10,000.

That meant wealthy people would pay more federal tax in high-tax states, such as California (13.3 percent top state income tax), New York (8.82 percent) and New Jersey (10.75 percent).

But what’s never mentioned is how the $10,000 SALT deduction cap also hits California’s middle class. That’s because the state’s 9.3 percent income tax begins at just $58,634 of income ($117,268 for joint filers). Which is less than New York’s top rate of 8.82 percent. In New York, an income of $58,634 would pay just 5.97 percent of income in state taxes.

But the real biggest problem is the immense cost of living in California from high taxes, high regulations, and preposterously high real-estate prices. The median price of a home has soared over $900,000, triple the average in such cheaper, rival states as Texas, Tennessee, and Florida—which also have no state income tax.

That means, just to afford a home in California, family income has to be at least about $180,000 a year. No wonder only about 25 percent of families can afford a home. But the state really is more expensive than that, because you probably will want to put your children in private schools.

Then you can avoid the consequences of school policies described a recent article in The Epic Times, “Parent Complaints of Anti-American, Anti-Christian Themes and Dark Imagery in Ethnic Studies Program.” Californians for Equal Rights and several parents sued the state because they allege “prayers to the Aztec and Ashe gods in the state-approved Ethnic Studies Model Curriculum violate the California Constitution’s free exercise of religion and no government aid clauses.”

Parents allege students also are being taught to pray to Huitzilopochtli, the Aztec god of sun and war, who “fed on human blood and hearts” during ritual sacrifices.

Or at least you could move so you live in one of the better school districts, such as Irvine Unified. But according to Zillow, a median home there now costs $1.1 million, up 18 percent in a year.

But let’s say you make $400,000, which—in what will come as a shock to non-Californians—still is a middle-class income in California. With deductions for a mortgage, etc., taxable income might be, say, $325,000. So if you’re single, you pay the 9.3 percent state tax on the income between $58,634 and $325,000.

That comes to 9.3 percent of $266,357, or $24,771 in state taxes.

But you can only deduct $10,000 of that from your federal taxes. On the remainder, $14,771, you pay the full whammy of federal taxes, which at $325,000 of taxable income would be 35 percent of marginal income.

Yes, I am simplifying a bit. But I know people like this. Likely so do you. They are successful professionals or small-business owners. They work long, long hours just for the pleasure of California’s great weather—and putting up with the high cost of everything and the low quality of almost every government service.

It’s true that this year Gov. Gavin Newsom signed into law Assembly Bill 150, which is supposed to provide relief from the SALT deduction problem. However, according to Jon Coupal, president of the Howard Jarvis Taxpayers Association, “it provided little relief for citizen taxpayers.”

And according to Seiler Certified Public Accountants (no relation to me) of Redwood City, “This workaround is in effect for taxable years 2021 through 2025.”

But people and businesses plan their futures many years out. Whatever small deduction derives to families from AB 150 for those five years may not continue afterward. Of course, it’s possible Congress could provide more relief by raising the $10,000 deduction cap to a higher number. But again, for now the uncertainty remains. Families cannot plan because they don’t know what might happen.

Finally, it’s this uncertainty that is the most grinding annoyance. California long has had an unfortunate habit of bouncing around its tax rates and policies. As long ago as 2005, the Legislative Analyst’s Office produced a study called “Revenue Volatility in California.”

Currently, revenue is way up due to Silicon Valley’s massive profits, largely from the COVID-era economy shifting to online shopping and entertainment. The state enjoyed a $38 billion surplus this year, according to the Legislative Analyst.

But instead of using that surplus to even out the tax system, reducing further volatility through instituting a flat tax or some other reform, Newsom and the Legislature spent all the money.