Joe Biden’s tax plan would likely hit wealthy Californians hard. Here’s why
Because the rich in California tend to be richer than most and pay a higher share of state income taxes, Californians could feel more of a sting than other states from Joe Biden’s tax plan.
The Democratic presidential candidate has proposed steep tax increases on people earning more than $400,000 with changes that include hiking the rate on higher incomes and capital gains and limiting wealthy taxpayers’ deductions.
“California is the master of taxing the wealthy, and this kind of piles on to that,” said Michael Shires, assistant professor of public policy at Pepperdine University.
One of the favorite campaign themes of President Donald Trump and his supporters is branding Biden and running mate Kamala Harris as eager to impose huge tax increases and big spending plans on the American public.
The mantra has been recited throughout the campaign.
“IF YOU WANT A MASSIVE TAX INCREASE, THE BIGGEST IN THE HISTORY OF OUR COUNTRY (AND ONE THAT WILL SHUT OUR ECONOMY AND JOBS DOWN), VOTE DEMOCRAT!!!” Trump tweeted from Walter Reed hospital Monday morning in all caps.
“Bottom Line: Joe Biden is going to raise your taxes,” said a Republican National Committee “reality check” during Tuesday’s debate between Trump and Biden as the candidates discussed tax plans. Pence told reporters in a call this summer that the Biden plan would reduce income ““at all income levels including the middle class.”
More taxes for the rich
The Republican claim that taxes will go up at all levels is correct, though particularly for wealthier Californians. “For the vast majority of people, the Biden tax plan wouldn’t make much difference at all,” said Howard Gleckman, senior fellow at the nonpartisan Urban-Brookings Tax Policy Center.
Biden’s plan would increase net federal revenue by about $3.35 and $3.67 trillion over the next 10 years, according to an analysis of four independent studies of the Biden plan compiled by the independent Committee for a Responsible Federal Budget.
The top 20% of income earners nationwide would face a federal tax increase of 2.3% to 5.7%, according to the analysis.
Those in the other 80% of earners would still see a tax increase of 0.2 to 0.6%, largely because of what the committee called “the indirect effects of increasing corporate taxes,” which could partially be passed on to employees.
People with income between $52,000 and $93,000 would likely see a tax increase of about $260 per year, or 0.4% of after-tax income, the Tax Policy Center said. Those making less than $26,000 would probably see an average increase of $30 annually, or 0.2%.
Currently, individuals earning more than $207,000 and joint filers making more than $414,700 pay at a 35% marginal rate. Individuals with incomes of more than $518,000 and couples earning more than $622,000 pay aat a 37% marginal rate.
Biden would raise those rates to 39.6%, the percentage that was in effect before 2018, when a Republican-authored tax cut law lowered it.
He also would impose Social Security taxes on people earning more than $400,000, and limit the itemized deductions wealthier taxpayers could take.
California impact
California has had a higher percentage of people in high income brackets than most other states. The average income for those in the top 5% of California incomes is $447,205, according to a survey by GoBankingRates, a personal finance website. Only Massachusetts, Connecticut, New Jersey, the District of Columbia and New York are higher.
California’s Legislative Analyst’s Office estimated that in 2015, 3.2% of state taxpayers earn $200,000 to $300,000, another 1.7% are in the $300,000 to $500,000 range, and 1.2% earn more.
California’s state income tax rate of 13.3% is already the nation’s highest, so adding Biden’s 39.6%, as well as higher taxes on investment income and capital gains that he seeks, will likely give Californians a “high effective tax burden,” said Garrett Watson, senior policy analyst at the Tax Foundation, a Washington-based research group.
Requiring the wealthy to pay more could also have an impact on whether the state could continue to attract the rich. Losing losing their tax dollars could strain a state budget that is susceptible to economic downturns partly because of its reliance on income tax. The personal income tax generated about two-thirds of the money going into the state’s general fund, its main operating budget, according to a 2018 study by the independent Legislative Analyst’s Office.
It found that in 2015, people earning more than $1 million paid about 40% of the state income tax revenue.
The high earners would also be limited in taking another break Democrats have been trying to get — a bigger deduction for state and local taxes.
California taxpayers have been hit particularly hard by the GOP tax bill’s capping that deduction at $10,000,. Harris and her husband, for instance, paid $316,243 in state and local taxes last year but could only subtract $10,000 as an itemized deduction. The $10,000 cap was imposed by the 2017 tax cut law.
Biden would put different limits on any such deduction. He’d impose a cap of 28% on the itemized deduction rate. In other words, even if someone were in the 39.6% bracket, Biden would allow them to deduct 28% of the spending.
He would also reinstate a pre-tax-cut law that in effect cuts the amount someone with an income of more than $400,000 could deduct.
The Biden plan would hit those taxpayers in other ways. Wealthy taxpayers are more likely to be hit by his proposal to end lower taxes for the wealthiest earners’ capital gains and tax them as ordinary income.
And employees earning more than $400,000 would have to pay the 6.2% Social Security tax, which this year they pay only on the first $137,700 of earnings. The tax would not be imposed on amounts of income between $137,700 and $400,000.
This story was originally published October 13, 2020 at 5:00 AM with the headline "Joe Biden’s tax plan would likely hit wealthy Californians hard. Here’s why."
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