Reagan Plan Would Cut State’s Taxes $1 Billion, Study Says
California taxpayers, contrary to predictions of many experts, would realize a huge tax reduction under President Reagan’s plan to overhaul the federal tax system, the state Franchise Tax Board said Monday.
The tax board’s study, the first by a California state agency, shows individual taxpayers receiving a about $3.2-billion cut in their federal income taxes by 1987, with corporate taxes rising about $2.2 billion.
That would make California the recipient of about $1 billion in tax relief overall.
To figure gains and losses, the study’s authors used a mathematical model, projecting the 1983 personal income of Californians and the percentage of federal income taxes they paid in 1983.
They cautioned, however, that they made no attempt to distinguish between any characteristics of California taxpayers and corporations that might differ from those in other states. As a result, the study does not reflect how specific industries might fare nor does it take into account any different types of tax shelters held by Californians and how they might be affected.
“The (figures) represent our best guess,” said Carol Horowitz, one of the authors.
The findings appear to challenge projections of many private and government economists that high tax states would do poorly under the Reagan tax plan, primarily because of provisions that would do away with federal deductions for state and local taxes.
It also would seem to add credence to some critics who believe the tax plan is not “revenue neutral,” as the Reagan Administration has said, but a tax cut overall that could add to the nation’s mammoth deficit.
Private tax experts generally downplayed the results Monday, saying more study is needed.
“It’s almost impossible to get good estimates of what the revenue will be from (the tax plan), because it’s very complex,” said George Break, professor of economics at the University of California, Berkeley. “It’s all just an exercise in guesswork.”
The report indicates that Californians would lose about $4 billion through the elimination of deductions for state income and sales taxes and local property taxes. However, that would be overshadowed by an almost $6-billion tax reduction brought about by lower overall federal tax rates and a $4.8-billion tax cut from nearly doubling the personal deduction from its present $1,050 to $2,000 per dependent.
A balancing of other projected losses and gains leaves the net gain for individuals at $3.2 billion, the report says.
On the business side, plans to reduce the maximum corporate tax rate would cut corporate tax liability by about $4.5 billion. However, that would be more than compensated for by changes in deductions for accelerated depreciation, repeal of investment tax credits and other tax plan changes that were calculated to shift the federal tax burden from individuals to businesses.
Private tax experts and those close to the study gave several reasons why individual taxpayers in California could do better under the plan than earlier believed.
First, while California still is counted among high tax states by some measures, its local tax burden is not too far from the national average. California, for example ranks 13th in tax burden per capita measurements, but 24th when tax burden is figured as a percentage of income.
As a result, the loss of deductions for state and local taxes would not have as dramatic an impact as in some other states.
Secondly, only about a third of California taxpayers itemize their deductions. The two-thirds who do not would lose nothing if the deductions for local and state taxes were eliminated.
There are several other factors that distinguish Californians from taxpayers elsewhere in the country.
Incomes in California are higher than those in 45 other states. So the lowering of tax brackets would have a more profound affect in reducing overall tax liability. Californians also pay more for their homes than those in most other states. While property taxes would no longer be deductible under the President’s proposal, mortgage interest payments--also among the highest in the nation--would still produce large income tax deductions.
The state Finance Department has nearly completed its own study of the President’s tax proposal but has not yet released its findings. However, Franchise Tax Board officials said they checked their figures with the Finance Department and found its conclusions “fairly close, though not exact.”
Tax board officials themselves have been very concerned about the figures, keeping them under wraps for more than a week while the numbers were checked and rechecked.
California is believed to be among the first states to complete a study on the Reagan tax plan’s local impact. New York, which has led the fight to maintain deductions for local and state taxes, is expected to complete its first major analysis later this week, a spokesman for Gov. Mario Cuomo said.