With zero media attention and an 80-0 vote, the California Assembly has approved a plan to facilitate a reduction in federal income taxes for a constituency consisting mostly of wealthy Californians. Only Californians with income from non-employee business activities operating through partnerships, LLCs and subchapter S corporations will benefit from Assembly Bill 150. Individuals who earn their livings as employees will garner no benefit from AB 150. Individuals who operate their businesses through sole proprietorships or as single member LLCs will also be excluded from any benefit.
While California cannot seem to grapple successfully with homelessness, COVID, water, power etc., the Assembly voted 80 – 0 to reduce the federal income taxes of some of its wealthiest taxpayers.
After receiving hundreds and hundreds of billions of dollars in federal aid during the pandemic, a handful of states have or are taking steps to undermine the revenues of the federal government by a work-around of the limitation of deductibility of state taxes for federal income tax purposes. This has a ring of “un-American” and/or “ungrateful” and/or perhaps, just “dirty”.
It is as if legislatures and governors have taken the role of tax shelter provider for their wealthy donors. The legislation is no more than an end run around federal imitations on the deductibility of state and local taxes for certain taxpayers.
In California, these actions will reduce the top federal tax rate from 37% to just over 34% for those earning their livings through pass-through entities.
AB 150 is essentially a welfare plan for the wealthy at the expense of the federal government which is being administered and paid for by the taxpayers of California.
A California lawyer, a partner in his law firm, earning $1 million from his partnership would see his or her federal income taxes drop by about $34,000. No such benefit would be available to any employee of the law firm. If that lawyer was the outside lawyer for the L.A. Rams, he would see a decrease in his federal income taxes while not a single player for the L.A. Rams would see their federal income taxes decline. Rhetorically, how does that make any sense?
How will California benefit from facilitating a reduction in the federal income taxes of its wealthiest taxpayers? It will not. Just the opposite. The State of California will undoubtedly spend tens of millions of dollars administrating this boon for the wealthy. California’s Franchise Tax Board will need to create and administer a program to provide a new subsidy for the wealthy. What sounds very straight forward would not be straight forward in practice and would be very expensive to administer. As a starting point, many, if not most single member LLCs and sole proprietorships would immediately become regular LLCs which would increase the number of tax returns filed by Californians and therefore subject them to all of the steps necessary for the State to review and monitor the filings. Many partnership agreements are incredibly complicated as regards allocation of income to each partner therefore making the administration of the plan difficult. Multi-state entities would present their own series of difficult issues of administration and enforcement.
In 2017, when Congressional Republicans successfully passed The Tax Cuts and Jobs Act, Democrats were mortified. Senator Mark Warner attacked the tax bill at the time by stating: “Nonpartisan analyses released yesterday confirm the final Trump-Republican tax bill will hike taxes on millions of middle-class Americans in order to pay for massive cuts for corporations and the wealthiest Americans.” The New York Times editorial board explained the tax bill as both consequence and cause of income and wealth insecurity. AB 150 dramatically exacerbates the issues raised by Senator Warner and the New York Times.
What has been heard about AB 150 or the other state created tax shelters from the opponents of the Trump-Republican tax bill because they believed it only benefited the rich, to the detriment of the poor? Crickets, nothing. Senator Schumer and Speaker Pelosi want the state tax deduction to be returned without limitation. Once past the outcry attacking Trump, they apparently welcome a reduction in their top donors’ federal income tax rates more than worry about equity, future new taxes or inflation.
There have been no cries from the wealth/equity warriors. There have been no cries of racism based upon the assumption that most of the beneficiaries of AB 150 will not be minorities.
Assembly Bill 150 is headed for Governor Gavin Newsom’s desk. It is a test of political courage for the governor who is facing a recall vote in September. The Governor can be just another governor who will ensure future increases in federal taxes or inflation for everyone as he signs a bill that will reduce federal revenues. The Governor can approve a bill that would cost Californians millions in administrative costs to reduce the taxes of its wealthiest taxpayers.
In his 2019 tax returns, Governor Newsom reported $1.5 million of income from pass-through entities. So, it is entirely possible (probable) that if he signs AB 150, his personal federal income taxes will decline by $50,000 or $60,000 in 2021. There is no avoiding this conflict of interest for the Governor, but it is a serious conflict and demonstrates in general which taxpayers would be the beneficiary of this legislation.
For Governor Newsom, this could be a Profiles in Courage moment. He can veto a bill that would cost the State of California millions to administer, benefit California not a penny and provide most of its benefits to those who need it least. Or, he can be a governor for all of the people and veto AB 150.
Recall voters will be watching.