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Jon Coupal- Columnist

Jon Coupal is an attorney and president of the Howard Jarvis Taxpayers Association -- California's largest taxpayer organization with offices in Los Angeles and Sacramento. [go to website] [go to Coupal index]

Local Taxes?
More tax gambits…

[Jon Coupal] 12/23/04

It has been said that all taxes are local. They are extracted from the locality of the taxpayer's wallet.

This is why the reaction to a trial balloon being floated by some close to the Bush administration is so fascinating.

The president has set tax reform, with an emphasis on simplification, as a major goal of his second term. This sounds attractive in principle, but previous efforts have shown that once specifics are introduced, the resistance to change becomes virtually insurmountable. For example, eliminating deductions for charitable donations and mortgage interest are unacceptable to most taxpayers, even if the proposal was coupled to an overall lowering of the tax rate.

One proposal at the federal level that has grabbed the public's attention is the elimination of the deduction for state and local taxes.

Howls of anguish are being heard from high tax states like California and New York. Opponents are accusing the administration of dark motives, claiming that this is an effort punish "blue" states, since those that voted for Kerry would be hardest it. While these claims may be tinged with paranoia, there is little argument that such a change could provide a windfall for the federal government.

Although the overall objective of such a change could be a general lowering of tax rates, considering the number of Congressional Representatives from high tax states and the fact that it is their high income taxpayers that would be hardest hit, it is unlikely that this plan will ever become law. But never say never.

Regardless of the outcome, the issue illustrates how state representatives use existing provisions of the tax code to justify higher taxes at the state and local level. These taxes, they say, are discounted because they can be deducted on the federal income tax form.

When Proposition 13 was on the ballot, this was one of the arguments used by the tax-and-spend crowd to urge its defeat. If Proposition 13 passed, went their reasoning, and the homeowner saved a thousand dollars in property taxes, this saving would be subject to federal income tax. So, to save $200 on their federal taxes, property owners were supposed to reject a savings of $1,000. Yeah, right.

Still, those who favor high taxes persist in their views. Rep. Robert T. Matsui (D-Sacramento) has expressed concern that a change in the federal law that would bar deductions could result in taxpayers, hit with a higher federal tax burden, demanding reductions in state and local taxes as compensation. Economist Max B. Sawicky at the liberal Economic Policy Institute agrees.

It's likely that many Californians will strongly object to this proposed change in federal tax law. Last year, 37% of tax filers claimed a federal deduction for state and local income taxes and state taxpayers already pay out $58 billion more to the feds than we get back in services. However, taxpayers should carefully examine the motivation of those politicians who claim to represent their interests. While some will oppose this measure out of genuine concern for taxpayers, for others it is just a turf war. They want to maintain the federal tax status quo because it makes it easier for them to maintain high tax rates at the state and local level.

As taxpayers observe the debate, they know, no matter how it turns out, the winner's prize will come out of their pockets. CRO

Jon Coupal is an attorney and President of the Howard Jarvis Taxpayers Association.

copyright 2004 Howard Jarvis Taxpayers association




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