The California Senate passed legislation Tuesday that aims to protect taxpayers from facing higher federal tax bills, the first concrete action in a Democratic state to push back against last year's tax overhaul signed by President Donald Trump.
Opening another front in their ongoing war with the Trump administration and Republican-led Congress, California Democrats are looking to insulate the higher-income taxpayers who provide a massive share of the state's revenue and ensure they don't leave for lower-tax states.
The new federal tax bill caps a deduction for state and local taxes at $10,000, which hits wealthier taxpayers in high-tax states like California the hardest.
The California bill would allow people to make a charitable contribution to the state in lieu of state income taxes, then reduce their state taxes by 85 percent of their contribution.
Senate President Pro Tem Kevin de León, the bill's author, hopes the bill would let people get around the federal changes by deducting their state taxes as a charitable contribution instead.
"This new law deliberately targets Americans in blue states...that didn't vote in large numbers for Donald Trump," said de León, a Los Angeles Democrat who has made legislative battles with Trump a central plank of his challenge to U.S. Sen. Dianne Feinstein, a fellow Democrat.
The legislation, which now goes to the Assembly, was backed by all Democrats and Republicans Anthony Cannella of Ceres and Scott Wilk of Santa Clarita, in a 27-7 vote. Four of the Senate's 13 Republicans did not cast a vote.
Several Republican critics said the bill may not be legal, potentially exposing taxpayers who take advantage to higher taxes and a fight with the IRS.
"This is a missile shooting at Washington, D.C., and it will not stand," said Sen. John Moorlach, a Republican from Costa Mesa in Orange County.
More than a third of California taxpayers used the state tax deduction in 2015, claiming an average of $18,438 — the third highest after New York and Connecticut, according to IRS data.
De León estimates that 3 million taxpayers would be eligible to benefit from the charitable contribution option.
Crafting a tax plan that can keep both taxpayers and the state whole — and also survive a legal challenge — has been a complex balancing act for De Leon and tax-law professors he consulted.
Efforts in California and elsewhere to get around the federal tax law, if successful, could significantly increase the federal deficit. Lawmakers who crafted the GOP tax plan capped the state and local tax deduction in order to limit the deficit impacts from a sharp drop in the corporate tax rate.
Lawmakers in left-leaning states have decried the federal tax overhaul and vowed to try to mitigate its impacts.
In New York, Democratic Gov. Andrew Cuomo has floated the possibility of allowing taxpayers to make a charitable contribution in lieu of their taxes, but he has not submitted a formal proposal to lawmakers.
New York, New Jersey and Connecticut have announced plans to sue Washington, potentially arguing the tax law violates states' rights and is unfair because it singles out Democratic states for political reasons. The suit has not yet been filed.
Some Republican-led states are also expecting their residents to face higher state tax bills because they've tied their tax laws to the federal tax code. Idaho and Nebraska, for example, are considering legislation state tax cuts as a result.
