Democratic state lawmakers’ interest in pursuing an unprecedented plan to minimize the hit that California’s high-income residents face because of the federal tax overhaul’s $10,000 cap on deductibility of state and local taxes may be losing momentum – undermined by strong warnings from Treasury Secretary Steven Mnuchin, who oversees the Internal Revenue Service, and by a new analysis that says the IRS could easily squelch the maneuver.

Senate President Pro Tem Kevin de Leon, D-Los Angeles, pictured, introduced Senate Bill 227 early this month. It would allow the estimated 6 million Californians who itemize their federal income taxes to effectively continue to write off state and local tax deductions in excess of $10,000 by allowing them to pay their state taxes to a state charitable foundation, the California Excellence Fund.

Tax experts note that states have long allowed tax deductions for charitable donations and say de Leon’s ploy is protected by the fact that tax laws are traditionally subject to stricter interpretation than most federal laws because of concerns that a rogue IRS could target individuals or companies it didn’t like.

Democratic lawmakers embraced de Leon’s proposal, saying the move would allow the 6 million state taxpayers who itemize deductions to save an average of more than $8,000 a year.

Washington Post: California shows how to take on Trump

But after Washington Post coverage of the legislation asserted it could create a “national boilerplate for skirting Trump tax changes,” the Trump administration took notice of what California was up to.

Politico reported that Mnuchin called the proposal in California and similar proposals in other high-tax states “ridiculous.” Mnuchin emphasized that the IRS was allowed to decide what qualifies as an IRS-recognized charity.

“Let me just say again from a Treasury standpoint and IRS, I don’t want to speculate on what people will do, but I think it’s one of the more ridiculous comments to think you can take a real estate tax that you are required to make and dress that up as a charitable contribution,” Mnuchin told reporters at the White House. He described the ploy as an obvious attempt by states “to evade the law.”

Mnuchin’s comments were backed up in a report by the Washington, D.C.-based Tax Foundation.

“This proposal, while interesting, is fairly obviously in violation of existing law and jurisprudence,” wrote veteran tax analyst Jared Walczak. “Just because the IRS has not consistently cracked down on some minor efforts here and there does not mean it would turn a blind eye to a concerted effort to contravene the tax code by providing a contribution in lieu of taxes program.”

Walczak warned state lawmakers that when it comes to de Leon’s Senate Bill 227, the IRS could readily thwart it under precedents that allow it to block deductions for charitable donations if the agency concluded there was no “charitable intent” to the donations.

Given that de Leon and other backers of the bill have openly described it as being designed to reduce Californians’ payments to the U.S. Treasury, lawyers defending the bill if it became law and was rejected by the IRS would face a difficult task: making a plausible case that a “charitable donation” that was undertaken with the goal of reducing an individual’s or family’s tax obligations meets the requirements set by the IRS for allowable charitable deductions.

The latest IRS overview of which deductions are allowed – Publication 526, released in 2016 under the Obama administration – doesn’t seem to allow such self-serving deductions.

It says that for a donation to qualify for a deduction, it must be “made without getting, or expecting to get, anything of equal value. … Qualified organizations include nonprofit groups that are religious, charitable, educational, scientific or literary in purpose, or that work to prevent cruelty to children or animals.”

Some Californians have long complained of their state’s status as a so-called “donor state” — one that sends more money to Washington than it receives. But as political tensions with the White House have heated up, and some federal funding put in play, at least rhetorically, analysts have crunched the numbers, shedding fresh light on the relationship between Sacramento and the nation’s capital. 

Hard to untangle

California’s Legislative Analyst’s Office, an independent body, “has pored over the data to calculate a number that is the monetary essence of California’s relationship with the United States,” the Los Angeles Times noted. “And what a number it is: The federal government spends some $367.8 billion a year on California. That’s an average of about $9,500 for every woman, man and child in the state.”

“In truth, the money isn’t spread out evenly. About 56 cents of every federal dollar spent in California, according to the analysis, goes to health or retirement benefits — Social Security, Medicare and money for low-income residents’ health care through the Medi-Cal program. Defense contracts are the next biggest slice of the pie, followed by paychecks to military and civilian government employees. From there, federal spending gets sprinkled among a number of programs run by the state government.”

The question of what Californians put in, however, has grown complicated over time. “Part of the difficulty stems from the tangled web of money that flows between individuals, the state and the federal government,” as the New York Times observed. “Perhaps the most cited figure comes from the Tax Foundation, a conservative group that found Californians got back about 78 cents in services per federal tax dollar paid in 2005. Other tallies have been higher: between 91 cents and $1.06 on the dollar, according to the Times. 

Limited authority

Although the widening political gulf between the White House and leading California Democrats spurred the interest in recalculating what taxpayers receive, experts have cautioned that even a battle of wills with Washington won’t likely result in a freeze on federal cash. “Key court decisions restrain the federal government’s ability to put coercive strings on funding,” the Sacramento Bee recalled. “Some Republican as well as all Democratic lawmakers would object on behalf of their California constituents. And with upward of $67 billion in federal grants being funneled to the state annually, picking and choosing would quickly get complicated.”

“The Supreme Court, for one, has at times been skeptical about the federal government attaching conditions to funding. In a much-discussed 2012 decision on the Affordable Care Act, Chief Justice John Roberts Jr. wrote that the law had gone too far when it effectively threatened states with losing federal Medicaid funding if they didn’t expand their Medicaid programs to low-income adults.”

Sizing up cutbacks

At the same time, however, the prospect of additional federal grants in at least one controversial area have come under attack from within the state itself. “In a letter to Transportation Secretary Elaine Chao, California’s 14 Republican members of Congress asked that the administration block $650 million in federal grants the state wants to use to electrify a portion of commuter rail that runs between San Francisco and San Jose,” The Hill reported. “Republicans said the money, which would come on top of more than $3.5 billion in federal funding already granted for construction costs, would be wasted.” 

“The Obama administration provided billions in grant funding through the 2009 stimulus package and an omnibus appropriations measure in 2010,” the site noted. “California voters approved a nearly $10 billion bond to fund the project in 2008. But since the high-speed rail system was first proposed, costs have ballooned, from about $33 billion to more than $60 billion.”

Republicans have also eyed another place to pare back politicized funds. “Rep. Duncan Hunter, R-Alpine, won’t request federal funds in the coming fiscal year for states, cities and universities that have a policy to not comply with enforcement of federal immigration laws,” according to a statement cited by the Los Angeles Times.

A big problem was pointed out to CalWatchdog.com by Esmael Adibi, A. Gary Anderson Center for Economic Research and Anderson Chair of Economic Analysis at Chapman University: Three of our Western States competitors make the Top Ten list of the least-taxed states: Nevada in third place, Utah in 9th and Texas in 10th.

Overall, the state with the least taxes is Louisiana, followed by Mississippi, South Dakota and Tennessee.

Adibi pointed out that California’s high rank derives largely from it having the highest personal income tax in the country, 13.3 percent at the top marginal rate after voters passed Proposition 30 in 2012. “Prop. 30 really pushed us over,” he said.

He added that, despite the Proposition 13 tax limitation measure, California ranked only 14th-best for property-tax collections. If property here cost less, then California would rank much higher. “But property is so expensive, the taxes paid equal the tax rate times the amount you pay for the property,” he calculated.

California also scored low on the overall 2015 State Business Climate Index, with third-worst business climate. Worst of all was New Jersey, followed by Connecticut.

That’s similar to the finding of CEO Magazine’s survey of CEOs, who have ranked California the worst state in which to do business for eight straight years.

And the Kosmont-Rose Institute Cost of Doing Business Survey found, “California dominates the list of the most expensive cities, with a total of 12 cities – nine in Southern California and three in the San Francisco Bay Area. Los Angeles and the San Francisco Bay Area are the two most expensive metropolitan areas in the western United States.”

Leaving the Golden State

“There’s no question high taxes at least affect some people on whether to stay in California or move to a state with lower taxes,” Adibi pointed out. He provided CalWatchdog.com a chart showing “Net Population Outflow and Destination” for California. “Net” means both those coming into the state and those leaving.

From 2005 to 2013: 279,000 Californians left for Texas, 222,500 for Arizona, 157,200 for Oregon, 153,200 for Nevada, 98,300 for Washington State, 76,900 for Colorado and 59,500 for Utah; all other states were 217,500.

Rankings

Some other rankings from the Tax Foundation “Facts & Figures”:

• Sources of California state and tocal tax collections: 28.1 percent from property tax, 22.3 percent general sales tax, 30 percent individual income tax, 4.3 percent corporate income tax and 15.3 percent all other taxes.
• Federal aid as a percentage of general state revenue: 25 percent. The national average is 30 percent. That is, California is a “donor state,” it pays more into the federal government than it gets back.
• State individual income tax receipts per capita: $1,750, ranking fourth; Connecticut was highest, at $2,174.
• State and local sales tax rate: 7.5 percent, highest of any state. (Some local governments add to that.)
• State gasoline tax rate per gallon: 45.39 cents, second highest. Pennsylvania is highest, at 50.50 cents.
• State spirits excise tax rate, per gallon: $3.30, 39th highest; California is Wine Country. The highest was Washington State, at $35.22.
• Like most states, California exempts groceries from the sales tax. The highest grocery sales tax is Tennesse’s, at 5 percent.
• California does not have a state inheritance tax, or “death tax.” The highest state rate is Washington State, at up to 20 percent.
• California state and local debt is $11,094 per capita, 8th highest. At the top is New York, at $17,405.

Tax Freedom Day is calculated by the Tax Foundation. For the nation as a whole, Tax Freedom Day — which includes all federal, state and local taxes — was April 21, three days later than in 2013. Say, wasn’t the Republican U.S. House of Representatives supposed to be keeping a lid on taxes? Except you might remember Speaker John Boehner and the boys agreed with President Obama to a Jan. 1, 2013 to a tax increase on both the rich and the middle-class.

At least in California we’re better off than three other states. For the sad souls who live in New York, Tax Freedom Day doesn’t come until May 3; and for New Jersey and Connecticut, it’s as late as May 9. And they have bad weather.

The best state is Louisiana, where Tax Freedom Day is way back on March 30. And arch-rival Texas’ Tax Freedom Day is on April 13.

So all those Toyota employees being relocated to Texas will enjoy not only lower housing prices, but lower taxes as well.

According to a report on state and local tax rates published by WalletHub, California has the second-highest local and state tax burden in the country. The average resident of the Golden State, according tho the survey, pays $9,509 in annual state and local states.

That puts California 36 percent higher than the national average and with the second-highest state and local tax burden in the country. The only state with a higher state and local tax burden is New York.

“Economic mobility – that is, our ability to climb the proverbial ladder – has a strong correlation to where we live,” writes WalletHub’s John Kiernan.

The WalletHub tax analysis took into consideration eight different taxes: real estate taxes, state and local income taxes, vehicle property and sales taxes, overall sales and use taxes, fuel taxes, alcohol taxes, food taxes and telecom taxes.

Tax Freedom Day on April 30th

WalletHub’s local and state tax findings are bolstered by the Tax Foundation’s annual report on state and local tax burdens. In 2014, it placed California with the fourth highest state and local tax burden in the nation.

The average Californian, according to the Tax Foundation survey, pays 11.4 percent of their income to state and local governments. That means, the average taxpayer must work until April 30, just to pay the government’s share.

There’s some reason to believe that the Tax Foundation’s numbers are skewed toward a lower tax bill. Its report used figures from 2011, which was before Proposition 30‘s $7 billion increases on sales and income taxes took effect in California.

California’s high poverty, high cost of living

California’s tax burden is compounded by a cost of living that vastly exceeds the national average. California has the highest poverty rate in the country, under the U.S. Census Bureau’s Supplemental Poverty Measure, which takes into consideration cost of living. Roughly 9 million Californians live in poverty under that metric.

In contrast, the official poverty rate, which was created during the Johnson administration’s “war on poverty,” leaves California with an official rate of 16.5 percent, which is higher than the national average but surpassed by other states. The official poverty threshold is three times the cost of a minimum food diet, with annual revisions based on inflation. Critics point out that such a rate does not vary geographically.

High burden of local and state taxes

With substantial differences in the cost of living and taxes for each state, the result is an American Dream limited by geography.

“The United States has historically been viewed as the ‘land of opportunity,’ a society in which a child’s chances of succeeding do not depend heavily on her parents’ income or circumstances,” a team of researchers at Harvard University and the University of California, Berkeley wrote in a July 2013 paper.  “But there is growing evidence that intergenerational income mobility in the U.S. is actually lower than in many other developed countries.”

“The U.S. is better described as a collection of societies, some of which are ‘lands of opportunity’ with high rates of mobility across generations, and others in which few children escape poverty,” the researchers concluded in January.

Precursor for tax revolt

California’s high tax rates has some questioning whether it will inevitably lead to another tax revolt, akin to Proposition 13 in 1978.

“On Tax Day 2014, California is creeping toward a point that the issue of taxation may once again be selected as the main concern for the state’s voters,” Joel Fox, the publisher of Fox and Hounds, recently predicted.

Yet, he also acknowledged how far-fetched that might sound.

“That might seem an irrational statement when you consider that in the most recent Public Policy Institute poll, taxes as a concern were ranked sixth behind, in order, jobs and the economy, water/drought, education, immigration and health care,” he wrote.

States with the Lowest Taxes (vs. National Avg.)

1. Wyoming (-66%)
2. Alaska (-60%)
3. Nevada (-52%)
4. Florida (-48%)
5. South Dakota (-46%)
6. Washington (-45%)
7. Texas (-25%)
8. Delaware (-25%)
9. North Dakota (-20%)
10. Colorado (-18%)

By Katy Grimes

While nearly every politician in America publicly decries the high cost of gasoline and fuel costs, most are also strangely silent about the soaring gas tax revenues that states are currently enjoying.

Californians always seem to pay the highest gas prices in the country. On top of record fuel prices, the state should be reporting how enriched it is by record gas tax collections.

Yet even with this record gas tax collection, Gov. Jerry Brown and state Democrats continue to claim that the state doesn’t have enough money and needs even more tax increases.

Having and eating your cake

Californians paid $8.3 billion to the state government in gas taxes last year. That’s the bad news.

The worse news is that the Tax Foundation just came out with a new report finding that Californians are not only overtaxed, we shoulder one of the highest tax burdens in the country. Should Brown’s Proposition 30 pass, increasing sales and income taxes, we easily slide into the number one spot for the highest taxed state in the nation.

“At a time when Californians could least afford it, our state and local tax burden was among the highest in the nation,” said former state Sen. George Runner, now an elected member of the state Board of Equalization. “This new report provides further proof that by every measure Californians are overtaxed.”

The Board of Equalization administers the motor vehicle fuel tax, diesel tax and 32 other tax and fee programs.

Adding to Californians’ overall tax burden, “Our latest numbers show that high gas prices resulted in a record windfall for government at the expense of California consumers,” Runner said. “It’s bad enough that California’s gas tax is among the highest in the nation. It’s even worse that gas taxes goes up whenever gas prices rise.”

California’s high taxes

California’s 2009 state and local tax burden of 11.8 percent of income is well above the national average of 9.8 percent. California’s top individual income tax rate is 10.3 percent. The corporate tax rate is an 8.84 percent flat rate. The state sales tax is 7.25 percent, with many counties adding onto that rate. And California collected $1,465 per capita in state and local property taxes in fiscal year 2009, according to the Tax Foundation.

The once-Golden State of opportunity and innovation now ranks 48th in the Tax Foundation’s State Business Tax Climate Index. The Index compares the states in five areas of taxation that impact business: corporate taxes; individual income taxes; sales taxes; unemployment insurance taxes; and taxes on property, including residential and commercial property.

Gas tax for gasbags

From July 1, 2011 through June 30, 2012, the Board of Equalization reported that it collected $6.9 billion in motor vehicle fuel taxes, up from $6.7 billion the prior year. Excise tax revenues accounted for $5.2 billion, while sales tax revenues accounted for $1.7 billion, Runner explained.

Over the same time period, the state collected $1.4 billion in diesel fuel taxes, up from $1.2 billion the prior year. Excise tax revenues accounted for $343 million, while sales tax revenues accounted for $1.1 billion.

California’s gasoline tax is 68.8 cents on every gallon of gasoline, and 77.1 cents on every gallon of diesel fuel, according to the American Petroleum Institute.

“What’s particularly concerning about these numbers is that they would have been even higher had the governor been successful in extending the higher sales tax,” said Runner.

Runner said that had Gov. Arnold Schwarzenegger’s 1 percent temporary sales tax increase from 2009 not expired on July 1, 2011, Californians would have paid an additional $96 million in diesel taxes last fiscal year.

Runner also explained that California’s 2010 fuel tax swap law would have required a larger motor vehicle fuel excise tax rate increase, costing Californians more than half a billion dollars extra in the 2012-13 fiscal year.

According to the BOE, these taxes and fees include:

* A federal excise tax of 18.4 cents per gallon;

* A state excise tax of 36.0 cents per gallon, up from 35.7 cents effective July 1;

* A sales tax averaging 3.12 percent when local taxes are included.

Runner said that it is important to note that the sales tax is calculated on the total price of the fuel sale including excise taxes, resulting in double taxation.

The breakdown for diesel is similar:

* The federal excise tax is 24.4 cents per gallon;

* The state excise tax is 10 cents per gallon, down from 13 cents effective July 1;

* The sales tax is 9.42 percent, up from 9.12 percent, plus applicable local taxes.

Race to the top tax bracket

“This is a race to the top, not in education, but in taxing. It shouldn’t take a genius to see how other states are doing it,” Runner said. “California’s economy is now full of man-made obstacles; that’s what caused the absolute devastation of this economic machine.”