Walters: Arbitrary Tax Policy Spawns an Offspring
History has proven that no political decrees are more arbitrary than those about taxation.
State and federal tax codes are riddled with the anomalies that those factors spawn. Two of the more perplexing, found in California’s sales tax system, illustrate the arbitrary nature of taxation politics:
- California doesn’t tax cold prepared food, such as a sandwich from a deli, but if the sandwich is heated it falls into a different category and is taxed.
- Three decades ago, the custom software industry persuaded the Legislature not to tax their very expensive products sold to businesses, but the off-the-shelf software that ordinary consumers use is still subject to taxes.
The overhaul of the federal income tax system two years ago by a Republican-controlled Congress and President Donald Trump was a potpourri of arbitrary decrees. They wanted to cut certain taxes, particularly corporate taxes, and offset the loss of revenue with other changes in tax laws.
Newsom Wanted to Increase State’s Earned Income Credit
One of the more arbitrary of the latter – clearly with a political motive – was limiting personal income tax deductions for state and local taxes to $10,000. Not only did it provide more revenue, but hit taxpayers in high-taxing – and Democrat-voting – states such as New York and California the hardest.
Democratic politicians in those states howled that it was a political punishment and it probably was – although it was no more arbitrary than any other tax decree.
California’s new governor, Gavin Newsom, wanted to increase the state’s “earned income tax credit” that benefits the state’s many working poor families, and proposed to pay for it by emulating a few of the federal tax overhaul’s revenue-increasing provisions affecting businesses.
It’s called “tax conformity” and in the past California has generally adopted changes in federal income tax law to simplify filling out tax returns, but in this case, it was specifically to increase revenue.
“We’re only conforming to those provisions that made sense,” Vivek Viswanathan, one of Newsom’s budget officials, told a legislative committee last week, characterizing the proposal as closing unjustified tax loopholes.
Approval Came Despite a Late-Blooming Effort
No, it was just another arbitrary effort to change tax policy for a specific purpose that had nothing to do with loopholes – which should be closed, by the way. Newsom wanted the money for a purpose that would resonate with legislators, helping the poor, and this was the way to get it.
Approval came despite a late-blooming effort by the auto industry to block one provision that would prohibit tax-free property exchanges. The industry said it would make business leases of cars more expensive because California was not conforming to a companion change in the federal law expanding write-offs for business purchases.
The Alliance for Automobile Manufacturers and the Association of Global Automakers said in a letter to Newsom that it could cost those leasing cars $100 million more a year and “It is unreasonable to expect a small number of companies in one industry to carry such a large proportion of the burden.”
There are always winners and losers when politicians, for whatever motives, arbitrarily change tax policy.
CALmatters is a public interest journalism venture committed to explaining how California’s state Capitol works and why it matters. For more stories by Dan Walters, go to calmatters.org/commentary.