In April, this column reported on the great SALT controversy and how it impacts California taxpayers. SALT stands for “state and local taxes,” and for many years prior to President Trump’s term in office, taxpayers could deduct those taxes from their federal tax returns without limitation. But in 2017, Congress enacted Trump’s tax reform, which limited the amount of state and local taxes that taxpayers could deduct up to $10,000. Whether limiting the SALT deduction is good or bad tax policy is not nearly as interesting as the politics behind it.

The adoption of the limitation by the Republican-led Congress was broadly perceived as a big middle finger to high-tax states such as California. Whether a pretext or not, states with modest income tax rates, or no income tax at all, complained that their residents were essentially subsidizing residents of profligate, big-spending states.

But moderate- to high-income taxpayers in California and other high tax states lost a valuable deduction on their federal returns. Suddenly they felt the full pain of high state income tax rates and property taxes. Frantic state politicians began plans to lessen that pain. For example, immediately after passage of the tax reform law, California floated the idea of a semi-voluntary “charitable deduction” scheme to give high-wealth Californians some relief. It would have created a “charitable” fund within the general fund so high-earning taxpayers could claim a deduction for “donating” the equivalent of what they owed in state taxes. But the IRS, in an opinion letter, quickly shot down that idea.

More successful was a method adopted by many states to provide relief for certain “qualified entities,” consisting mostly of small businesses organized as partnerships, LLCs or S corporations. While Gov. Gavin Newsom signed California’s workaround embodied in Assembly Bill 150, it provided little relief for citizen taxpayers.

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