The ends do not justify the means.
In today’s world it seems to have become a quirky, archaic sentiment.
The California Legislature should pause and give deep and reflective thought — assuming they are capable of doing so — about the Pandora’s box they are chomping at the bit to open.
The genie they want to release from the proverbial bottle is to essentially allow those who are wealthier than most in California to make charitable contributions to the state treasury and receive credits toward their state income tax liability. This would allow them a charitable deduction on their federal income taxes to work around the tax reform’s $10,000 lid on state and local tax deductions.
It’s easy to paint anything these days into “Red” versus “Blue” States terms. The sentiment behind the proposal, politics aside, is understandable. It is part of a broader sentiment that taxes should be fair.
But what the state legislature is about to engage in is not fairness, tax reform, or even pure politics. It’s undermining the system that they are part and parcel to. California is no more independent of the United States than Stanislaus County is independent of California.
Five years ago the California Legislature disbanded redevelopment agencies. Included was a directive that properties that local RDAs held that hadn’t been transferred to the city had to be sold and the proceeds split with the state. Never mind the fact those properties are being paid for over a 30-year period with property taxes procured from local property owners and not all property owners throughout the state. That means anyone in such an RDA is getting the raw end of the deal as the state will take the bulk of the money that they can spend anywhere they please in California, but more than likely will end up in Los Angeles or San Francisco.
No local government impacted by the loss of the RDA pursued a charade by contorting laws to negate the state’s action on the pocketbooks of local property owners. Yes, they sued, but that is not the same thing as crafting a loophole.
State tax reform is out of the question for the legislature as it would either mean less money for them to spend or require them to shift the burden to other taxpayers that would likely be met with ballot box backlash.
It is not wise, however, to start carving out exemptions to undermine the taxing authority of a level of government that you are subordinate to and not an equal. Imagine how the legislature would react if San Francisco came up with a way to cushion a state income tax increase on a select portion of their populace that they were crushing with city taxes by making it possible to use those city taxes as a charitable deduction on state taxes.
Besides further gnawing away at the underlying foundation of how this country’s multiple layers of government work, it also can expose the very people the legislature claims to want to help to severe financial penalties.
Governor Jerry Brown early on said he favored the legislature’s concept but expressed doubt it would pass muster with the Internal Revenue Service.
And while they the IRS hasn’t ruled on such a proposal, this last week they made it clear through a spokesperson they had serious reservations about it.
Hopefully if such a move to turn state taxes into a charitable deduction goes through, the IRS would make a definitive ruling before taxes for the year 2018 are filed. But since instantaneous suing every time something is adopted now has become the norm it is likely an IRS ruling could be held in abeyance by the courts until it is hashed out.
The dangers of that are clear. If someone operates as if the state legislature is the authority on federal taxes and pays their federal tax obligations based on that and the IRS prevails they won’t be immune from paying back taxes, interest, penalties, and interest on the penalties.
Perhaps the worst thing about it is that it creates yet another precedent to wiggle around laws that you disagree with.