California looks for ways around federal tax changes

FILE: Senate President Pro Tem Kevin de Leon (Photo: Kevin de Leon/Facebook)

SACRAMENTO, Calif. — Democratic California lawmakers are exploring ways to blunt the impact of the new federal tax law on the state’s taxpayers.

Federal law has long allowed people to deduct their state and local taxes from their federal tax bill, but the tax overhaul signed last month by President Donald Trump caps that deduction at $10,000.

That change will be especially notable in high-tax states like California, where more than a third of taxpayers claimed the deduction for an average of $18,438 in 2015 — the third highest after New York and Connecticut, according to IRS data.

Senate President Pro Tem Kevin de Leon plans to introduce legislation allowing people to make a donation to the state in lieu of income taxes. That would allow them to claim the federal charitable deduction, at least partially getting around the change.

De Leon, of Los Angeles, is running for U.S. Senate. His legislation could be introduced as soon as Thursday, when lawmakers return to Sacramento after a three-month break.

“Our hard-earned tax dollars should not be subject to double-taxation, especially not to line the pockets of the Trump family, hedge fund managers and private jet owners,” de Leon said in a statement last week.

De Leon said he is working with law professors from University of California, Los Angeles; UC Davis and the University of Chicago on his plan.

Jon Coupal, president of the Howard Jarvis Taxpayers Association that lobbies for lower taxes, said he is skeptical that the proposal is legal and suspects it would be quickly overturned by Congress.

“I think it’s clever but I’m not sure it’s going to fly,” Coupal said.

The proposal is modeled on an existing law that allows people to get a partial tax credit for contributions to the CalGrant program, which provides college scholarships. Other states use similar policies to offer tax credits for private school vouchers.

Darien Shanske, a UC Davis law professor who is consulting with the Senate on the proposal, said there’s little doubt it’s allowed under current IRS regulations. There’s a risk that the IRS or Congress could change the rules, but Shanske said that’s unlikely in part because the private school tuition benefits are popular in Republican-leaning states.

De Leon’s measure would not affect property taxes, which are paid to local governments.

Some aspects of the proposal remain to be resolved.

Crafting laws in response to the federal tax overhaul has been especially challenging in California, where voters have enshrined much of the tax code in the constitution, placing them off-limits to lawmakers, Shanske said.

Many changes would require support from two-thirds of lawmakers.

The charity proposal has garnered most of the early attention because it can pass with a simple majority.

Among other potential responses, the state could shift some of the income tax burden from individual taxpayers to businesses, which would be able to deduct their state taxes from their federal bill.

The state also could raise tax rates on pass-through businesses, a type of business that will see a substantial tax cut under the federal bill.