If Republicans’ tax overhaul passes next week, California taxpayers are likely to lose many of the state and local deductions that saved them more than $100 billion on their taxes in 2015. But legislative staffers and tax law experts are already gaming out ways to adjust the state’s tax code to offset the loss of those deductions and counter other changes to federal taxes.
That could save Californians a lot of money – but also explode the federal deficit.
State lawmakers have not yet put a specific proposal on the table. They don’t want to get ahead of unfinished federal policy. But one senior California Assembly aide said it wasn’t a matter of whether state leaders adjust tax laws, but how and how much.
And those legislative maneuvers are likely to have a lot more success protecting California taxpayers than lawsuits. Gov. Jerry Brown and two of his fellow blue state counterparts, Gov. Andrew Cuomo of New York and Gov.-elect Phil Murphy of New Jersey, raised the specter of legal challenges to the tax overhaul on a conference call with reporters earlier this week.
“I’m not a lawyer but I’m betting there are some holes and flaws in this,” Murphy said. “We’re going to have to take this to the limit.”
Tax law experts, however, are dubious. “Any constitutional challenge to the rollback of the state and local tax deduction would face an uphill battle,” University of Chicago Assistant Professor of Law Daniel Hemel said via e-mail. “The 16th Amendment gives Congress the power to tax income from whatever source derived, and the Supreme Court has said repeatedly that deductions are a matter of legislative grace.”
Hemel and other academics say there are far more promising ways for states like California and New York to counteract the rollback of the state and local tax deduction that congressional Republicans are on the verge of enacting.
