SAN JOSE (KPIX 5) — Democrats in Sacramento are exploring ways to help Californians save money by creating a loophole around deduction limits that are part of the new federal tax law.
The recently enacted law caps the deduction for state, local and property taxes at $10,000.
When President Trump signed his new tax plan into law, Democratic lawmakers say it dealt an especially heavy blow to California taxpayers by putting a cap on the state tax write-off.
“All of the wealthy people are benefitting from this, and in California — because of our high taxes — we will be penalized severely by this tax act in Washington. And we want to change that,” said State Sen. Jerry Hill from San Mateo.
Californians pay some of the highest state and local taxes in the nation. But the cap on state tax deductions in President Trump’s new tax plan means many will pay a lot more than the $10,000.
In fact, about a third of Californians claim around $18,000 a year.
A new bill introduced Thursday would do an end-run around the federal law by allowing Californians to pay their state taxes as charitable donations through a newly created fund called “California Excellence.”
That would allow taxpayers to deduct the entire amount paid to California from their federal taxes.
“You can make your contribution to the California Excellence plan and offset your federal tax obligation dollar for dollar,” explained Hill.
San Jose State tax professor Annette Nellen told KPIX 5 the idea is modeled on an existing loophole that allows a deduction for contributions to college scholarship programs.
“Arguably yes, it is a gimmick to provide some tax relief to high-taxed Californians,” said Nellen. “They would not be doing this unless Congress cut back the federal deduction for State taxes.”
But Nellen was skeptical the new law would survive on such a massive scale.
“I think Congress would step in and say in a way, that’s really paying state taxes,” said Nellen.
The new bill would not affect property taxes which are paid to county governments.
But if it does make it to the floor of the legislature, it would only require a simple majority to pass.