Contributor

John Campbell

John Campbell (R-Irvine) is a California State Senator representing the 35th District in Orange County. He represents the cities of Newport Beach, Laguna Beach, Irvine, Costa Mesa, Huntington Beach, Seal Beach and Cypress. He can be reached through his Senate website and through the website for his California Senate campaign. [go to Campbell index]

Legislature Balks At Federal Tax Code
Expensive complications just for California taxpayers...
[John Campbell] 3/11/05

It's that dreadful time of year again - time to prepare and file your federal and state income tax returns.

Thankfully, during the last four years the Bush administration has enacted a host of new tax benefits, deductions or cuts. Every taxpayer who pays federal tax is paying less because of these initiatives.

On the other hand, California is one of only a handful of states that has its own separate income tax code and whose codes don't automatically conform with changes in the federal code. (Incidentally, having our own separate code wastes taxpayers' money and the government's money, but that is an issue for another column.)

When the federal government changes the federal tax code, the Legislature has the opportunity to change the state tax code to match those changes. During the Clinton era - when the federal changes were all tax increases - California was quick to adopt them all.

However, since 2002 - during which time many of the federal changes were tax reductions - the Legislature has not adopted a single significant federal change. Therefore, the federal and California tax codes are becoming increasingly different, and therefore more complex and costly. And your California taxes continue going up, while your federal taxes are going down.

Here arejust a few illustrations of things you can do on your federal tax return that you can't do on your state tax return:

Family leave: You are now paying additional payroll tax for the family leave program passed by California during the Gray Davis era. You can deduct that additional tax for federal purposes but not on your state tax return.

Health Savings Accounts (HSAs): An HSA enables people to get a cheaper high-deductible health insurance plan and then save the money on a pre-tax basis to cover the deductible.

But naturally, the Democrats in the Legislature have rejected bills to allow Californians to have this cost-effective means of saving for their own health care needs, all the while decrying the cost of health insurance and the number of uninsured. In fact, California will tax you on any money that you or your employer put into the plan and, in some cases, you will get a 10 percent penalty for participating!

California's liberals are happy to tax you for a multibillion-dollar, government-run health care plan, but the concept of allowing you a tax deduction to provide for yourself is "too costly" to the state treasury. This is outrageous.

Depreciation: Federal law allows people to deduct depreciation of assets at a much faster rate than state law does. This means lower federal tax and higher state tax. It also means often keeping three sets of books: one for bookkeeping purposes, one for federal tax purposes and a third for California tax purposes.

Small business: If by chance you are trying to operate a small business, there are literally dozens of new federal tax breaks, particularly for start-up companies. California allows none of these deductions, which would help offset the additional regulatory and legal burdens this state imposes.

Foreign income: If your job transfers you overseas for a while and you earn income on which you must pay taxes in a foreign country, federal tax law allows you to exclude that income from federal taxation. California makes you pay tax on it so you are taxed twice.

The result is that people working for multinational companies often change their state of residence to Florida while in an overseas posting.

The truth is that lower taxes often lead to more total tax revenue because of the increase in economic activity engendered by the tax decrease. Keeping successful people here to pay taxes in this state is far better than overtaxing them to the point that they pack their bags and pay all of their taxes elsewhere.

This debate is all driven by an unyielding Democrat ideology insisting that government must take and spend more of your money from you because you cannot be trusted to spend or invest it yourself. That is ultimately the great divide over health care, Social Security, pensions and tax policy. Remember that as you fill out your increasingly expensive and needlessly complex California income- tax return this year. CRO

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