California is spending significant time and effort trying to concoct a way for its high-income residents to evade federal taxes, in direct response to the newly enacted Tax Cuts and Jobs Act, which caps allowable state and local tax deductions from federal income taxes at $10,000 per taxpayer.
On Jan. 4, Democratic Senate President Pro Tempore Kevin de Leon introduced Senate Bill 227, which would allow residents to “donate” to a new state public-purpose “excellence fund” and receive a tax credit in return. Taxpayers would then benefit by deducting their “donations” to this new state fund from their federal taxes. This bill was passed by the California Senate on Jan. 30, and must now clear the Assembly before going to Gov. Brown’s desk.
A roadblock to this legislation might be found in the fact that federal tax law specifies that donations which provide a direct monetary benefit to the donor do not qualify as charitable deductions. Jared Walczak, a senior policy analyst at the nonprofit Tax Foundation, was cited by Reuters as predicting that the measures’ usefulness to taxpayers would ultimately be “shot down” by the IRS.
“Just fundamentally, the IRS will see right through this”, he said, pointing out that federal law requires charitable contributions to have genuine charitable intent and purpose. “There has to be an actual benefit to the recipient, and the only beneficiary here is the donor.”
California’s residents don’t need our state government spending more time and resources trying to evade taxes or create new, supposedly deductible, taxes. The only reason higher earners are even in this position is because California’s state taxes are astronomical. What we need are policymakers in Sacramento who will make our state government more efficient and accountable, reduce waste and redundancy, and limit nonessential government services. Then, instead of trying to circumvent the federal government, California could focus on reducing its own state taxes, which might help prevent higher-income taxpayers from fleeing to lower-tax states.
And if you want to drive businesses out of California as well as individuals, look no further than Assembly Constitutional Amendment 22 proposed by Assemblymen Kevin McCarty, D-Sacramento, and Phil Ting, D-San Francisco, which would create a tax surcharge on any California company earning more than $1 million, requiring that approximately half of any savings these companies will see from the recent federal tax overhaul must be turned over to the state.
Proponents of this proposed amendment argue that a tax-heavy state like California will be hurt by declining revenues that pay for social programs, and the tax surcharge is a way of compensating for those anticipated losses. That is an interesting perspective when you realize that the savings to businesses come from the taxes they would have paid to the federal government, not the state of California. So even though the savings to businesses is not coming out of the state’s coffers, California’s legislators want to try to confiscate it.
In an editorial on Jan. 21, the Sacramento Bee called the McCarty-Ting proposal “dumb”, saying that “California’s tax system should be updated to match a 21st century economy.” The editorial pointed out that California will maintain a $13.5 billion reserve this year, and “bills that blindly soak big business and the rich at a time of budget surplus solve nothing.”
California is the heart of the high-tech industry, but our state’s policies may prevent us from achieving the full potential benefits from this, and other industries. Look no further than Menlo Park, California-based Facebook. On Jan. 23, the Atlanta Business Chronicle reported that Facebook is considering the development of a more than 400-acre data center campus in Newton County, Georgia. Facebook could potentially invest $20 billion in the project over two decades, and is initially expected to invest $1 billion and create up to 100 tech jobs. The article went on to say, “Atlanta is also said to be on the radar of other West Coast Internet behemoths. Amazon and Microsoft are eying metro Atlanta for standalone data centers … In fact, Microsoft is already quietly leasing space in a metro Atlanta data center”.
Amazon’s $5 billion second headquarters, for which Atlanta is considered a front-runner, would create up to 50,000 jobs over the next few years. Meanwhile, Apple announced plans on Jan. 17 for a second campus, which would initially house tech support workers, and Atlanta will likely aggressively compete for that project as well. The Atlanta Business Chronicle writes that “Demand is also fueled as Fortune 500 companies move IT operations from the Northeast and California to the Southeast (think State Farm, Anthem, and General Electric) in search of lower operating costs.”
On Jan. 31, the music-streaming service, Pandora, which is headquartered in Oakland, announced a lay-off of 5 percent of its workforce, and, as part of its restructuring, plans to shift away from investments in Oakland and expand its workforce in Atlanta, where the cost of living is lower.
There are so many business-friendly states where small and large businesses can flourish and where housing for their employees is ample and affordable.
Californians enjoy the amazing natural beauty and great weather of our state, but at some point, you have to ask why anyone puts up with the restrictive and unfriendly business climate that exists due to our policies, bureaucracies, and tax burdens.
Terry McLaughlin, who lives in Nevada City, writes a twice monthly column for The Union. Write to her at email@example.com.
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