If you’re more interested in the how’s than the why’s of California tax reform — specifically, how altering the state’s tax codes can reduce California’s federal tax burden — then I suggest you check out this opinion piece by economists Andrew Chang and Justin Adams.
Here’s the thrust of their argument:
1) The concept is simple: If the state collects taxes in corporate or personal income tax, Californians can deduct it from their federal taxes; if the state collects taxes in the form of sales tax, individuals cannot deduct it from their federal taxes. By subsuming the amount currently collected in state sales tax into either a state income or corporate tax, the state would increase its tax withholdings to Washington.
2) Let’s say that you make $100,000 per year. Let’s further assume that you pay about $20,000 in state income tax and about $10,000 in state sales tax every year. Under the present system, you would only be allowed to deduct $20,000 from your federal income tax. However, if you subsumed the sales tax into the personal income tax, then you would be able to deduct $30,000.
3) There are different ways to structure such a new tax. For example, we can make the revenue stream less volatile as well as reduce the tax burden for the lowest income earners simultaneously.
BTW, Chang and Adams, who run a Sacramento consulting firm
and have worked for Governors Schwarzenegger and Wilson, estimate that the direct benefit to the California taxpayer would amount to about $5 billion per year — and support the creation of 64,000 new jobs.
Not too shabby.