California Needs Longer-Term Solutions to the SALT Deduction Cap

Although California has a state-level workaround for the 2017 Tax Cuts and Jobs Act’s state and local tax deduction cap, it may be wise for the California legislature to focus on long-term solutions that involve the SALT deduction and potential tax changes from the Trump administration—or future ones.

For example, lawmakers could explore incentives and deductions for businesses and residents beyond the short-term pass-through entity fix. Policymakers should consider the following strategies to address the long-term implications of the SALT deduction cap and other federal tax limitations.

Expand state-level deductions and credits. Lawmakers should introduce and expand deductions and credits for middle-income earners. Middle-income households face financial strain from rising costs of living. Expanding tax credits or deductions such as child-care credits and renter’s insurance would increase their disposable income.

Childcare credits make staying in the workforce more affordable for middle-income parents. Legislators also could look to incentives for education and health care—critical sectors employing many individuals who struggle with costs of living.

Maximize tax incentives through industry advocacy. Businesses can advocate for industry-specific credits by working with industry groups or California Chamber of Commerce to find incentives. Such tax incentives attract and retain employees.

California is home to many industries that other states lack at the same professional level, including Hollywood, Silicon Valley, and a plethora of biotechnology corporations. Many of these industries have chosen California as their home for its unique tax benefits and politics.

But over the last few years, many large companies either moved their headquarters out of state or downsized their California workforce due to labor constraints, politics, or taxes. This creates a dangerous shift of higher taxes and living costs onto remaining California residents. The state legislature should review and revamp the current business incentives to balance out this burden.

Expand public-private partnerships. California could encourage public-private partnerships to develop affordable housing, transit infrastructure, and workforce development programs. This can indirectly reduce financial strain and dependence on SALT deductions by lowering living costs for residents.

California lawmakers could encourage these public partnerships to outflow this type of financial infrastructure through more aggressive tax incentives, credits, and deductions that individuals may not be entitled to based on the current federal tax climate.

While California’s pass-through entity workaround provides some relief, lawmakers could refine and expand its scope. This could include provisions for smaller businesses that may not benefit from them now or additional credits to offset federal tax burdens.

The pass-through entity tax is crucial for the California taxpayer to even the playing field with other states and their residents. But if California continues to be known as the state with the highest income and property tax brackets—with no true workaround for federal tax adjustments—it will put the state and its residents at a serious disadvantage.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Lauren Suarez is an attorney at RJS Law with focus on federal and state tax controversy matters.

Allison Soares is a tax attorney at Vanst Law who focuses on audits, collections, appeals, international disclosures, and all other tax problems.

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