SAN FRANCISCO CHRONICLE: How to combat the Trump tax
By Bob Hertzberg & Dr. Laura D. Tyson
Sweeping legislation with arcane and opaque provisions that is barely deliberated always ends badly for the public. When it is agreed solely on a partisan basis favoring the special interests of the ruling party, and aimed at punishing states dominated by voters from the opposition party, it is a mockery of democracy. Yet, just such a calamitous act — the first major overhaul of the U.S. tax system in 30 years — has just been passed by the Republican majority and signed into law by President Trump.
Gov. Jerry Brown is right to call the new tax law “a monstrosity” that is “bad for you, and bad for America.” Most Californians agree, according to a UC Berkeley study.
Fortunately, we live in a federal system in which states still have the autonomy to make their own laws and tax policies to compensate for the damage done in Washington. That’s why California should impose a small tax on high-end services. This solution could work in tandem with other statewide proposals to stabilize California’s budget with new revenue sources that provide the fiscal room to fund essential services and provide tax relief to those most hurt by the Trump tax law.
The Trump tax law will have a profound impact on California by:
Eliminating the individual mandate for health care insurance, which will inevitably raise premiums.
Capping the mortgage interest deduction in one of the most expensive housing markets in the country, which will further strap homeowners already on the edge of affordability.
Limiting deductibility of state and local taxes on federal tax returns. The Trump tax cut is, in effect, a tax increase for millions of Californians. Instead of funding foster care, preschool or lowering tuition at a California State University campus, that extra tax burden created by limiting deductibility will go to finance federal tax cuts for corporations and the wealthy. The reliance on deductibility — going back to the Civil War-era Revenue Act of 1862 — has been part and parcel of the fiscal formula by which all states have arranged their finances. It is what has allowed states to avoid double taxation of their citizens while affordably providing essential services, from education to infrastructure, public safety and the courts. These services benefit not only the state but also the entire nation by strengthening the competitiveness of the U.S. economy.
Adding $1.5 trillion in debt to the federal budget, which down the road must be paid back. This will put pressure on Congress to balance the budget by making significant cuts in entitlements Californians depend on such as Social Security and Medicare.
Here is how we can begin to shift our state’s finances to meet this unwelcome challenge.
Though California’s 21st century economy primarily consists of services, they remain untaxed. Establishing a small tax on high-end business services, such as those provided by lawyers and accountants for corporations and other business services — rather than health care and child care for everyday Californians — would be an important step toward rebalancing the state’s fiscal formula upended by the Trump tax. Forty-nine states tax services, and 43 of those states tax more services than California does, ranging from interior design to marketing, lobbying, admission to sporting events, accounting and even things like circuses and fairs. (California taxes 29 small services such as welding and gift wrapping.) In Hawaii, for example, there is a 4 percent tax on legal and accounting services. In New Mexico, large businesses that employ accountants incur a 5 percent service tax.
The state Board of Equalization found in 2015 that services, a significant part of our economy, remain largely untaxed and could provide significant revenue. If California taxes even a small fraction of this, through high-end services, the effect on businesses would be minimal because they can continue to deduct these costs on their federal taxes — even if individuals can’t. Under the Trump tax, corporations’ tax rate is reduced to 21 percent from 35 percent. Other businesses and partnerships will get to deduct 20 percent of their taxable income as “pass-throughs.”
What has made California a success is the fairness and opportunity it has provided its citizens by promoting public welfare over special interests. That is true of our immigration and environmental policies as well as our economic policies. We have the means to defend California’s interests and should do so swiftly and smartly.
State Sen. Bob Hertzberg, D-Van Nuys, is a former Assembly speaker. Laura D. Tyson was chair of the President’s Council of Economic Advisers under Bill Clinton and is the director of the Institute for Business and Social Impact at the Haas School of Business at UC Berkeley.
Note: This piece was published in the San Francisco Chronicle on January 2, 2018.