California Tax Collection Spikes as Rich Pre-Pay State Taxes

California’s tax revenues are up sharply as the rich pre-pay 2017 income taxes before the Trump tax cut starts limiting the amount of state and local taxes the wealthy can deduct.

Breitbart News recently reported that California state tax collection for the first three months of 2018 was up by a surprising $3.3 billion over the Department of Finance forecast. Legislative Analyst’s Office economist Justin Garosi told the San Francisco Chronicle that the strong trend may have strengthened in the first 20 days of April, the biggest tax collection month each year, with personal and corporate income tax collection up $700 million over forecast and up about $1 billion over last year.

That is all great news for California, whose Standard & Poor’s credit rating was slashed to a near “junk bond” BBB at the height of the Great Recession in 2009. The combination of an economic recovery and a huge Sacramento across-the-board tax increase pushed California’s solvency rate back to AA by 2014. If the current tax boom continues, California could garner the prestigious AAA investment grade by 2020.

But Garosi warned the Chronicle that the euphoric tax spike has been driven by sharp-eyed accountants advising their highest income customers to game the transition period for the Tax Cuts and Jobs Act by pre-paying state income taxes before the new federal so-called state and local tax (SALT) deductions are limited to $10,000 in tax year 2018.

Breitbart News reported that the State Franchise Tax Board estimates that the approximately 61,000 California households that declare over $1 million of taxable income each year stand to pay another $9 billion in federal taxes beginning in 2018. Another about 150,000 state households mostly making over $200,000 will pay another $3 billion.

For the state’s fiscal year, which runs from July 1, 2017 to June 30, 2018, cash receipts are about $6 billion over the Department of Finance’s budget plan, which will not be updated until Governor Jerry Brown’s mid-June budget revision report.

Only 13.8 percent of California taxpayers elect to use itemized deductions that can be impacted by the SALT cap. But those higher income earners deduct an average of $18,438, which means about a $3,200 average federal tax increase. Moreover, some very high-income earners could pay millions of dollars more in federal taxes.

California progressives fear that those sharp-eyed accountants are now telling their richest clients that the best way to benefit from the Trump tax cut is to “vote with their feet” and move their official residences to states like Arizona, Nevada, and Texas, which have dramatically lower tax rate burdens and much more business-friendly regulatory structures.

That trend may already be happening. A CNBC analysis found that from 2016 to 2017, California saw a net 138,000 people leave the state, while Texas grew by 79,000 people, Arizona added 63,000 residents, and Nevada saw a 38,000 gain.