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Revenge or Not, Bush Tax Plan A Killer for California: California Focus

From the moment President Bush’s tax restructuring panel announced its proposals for simplifying the federal tax code, one thing was clear: If this passes, Californians will pay more.

Fully $17 billion more in federal taxes than they do now, according to state Treasurer Phil Angelides, about $2,200 per taxpayer per year, or $500 per year for every man, woman and child in California, citizen or immigrant, legal or illegal.

Also hard hit would be states like New York, Massachusetts, Maryland, New Jersey and Illinois – all so-called “blue” states that voted Democratic in the last presidential election. On the other hand, taxpayers in states like Texas, Tennessee, Wyoming and Nebraska would pay less — and all those are “red” states that voted for Bush in 2000 and 2004.

This prompted some Democrats immediately to call the plan simple political revenge. “This isn’t coincidence, but I hope it isn’t just a raw political move,” said Angelides, implying that he thinks it is. “There is just no question that the burden from this would fall disproportionately on blue states.”

Revenge or not, the Bush tax proposals would amount to the largest tax increase in California history, dwarfing the $5 billion tax hike enacted by Republican Gov. Pete Wilson and a Democratic-dominated Legislature in the early 1990s.

Here’s why this plan would hit California so hard: It seeks to change the federal income tax deduction for mortgage interest, setting a limit of 15 percent of interest paid on mortgage loans up to the maximum that the Federal Housing Administration will insure, now at $312,895 in California.

At the same time, deductions for state and local taxes paid would also disappear.

These changes would hit California harder than any other state, because real estate values are higher here than almost anywhere else and because state and local tax levies also are well above average.

The FHA loan insurance cap, for example, is currently almost $260,000 below the median cost of a California home.

The Bush plan proposes to make up for these losses by allowing larger 401(k) and Individual Retirement Account (IRA) contributions every year, with both types of accounts allowed to grow tax-free and withdrawals also to be tax free. New tax-free accounts would be set up for health, education and home-buying expenses. Plus, changes would be made to ease the Alternative Minimum Tax that’s been hitting more and more middle-class taxpayers each year. The exclusion from taxation of home sales profits would also rise, from $500,000 to $600,000, with yearly inflation adjustments.

For almost all Californians, these other changes taken together don’t come close to making up for the lost deductions.

“When you take away the mortgage tax deduction, you are not affecting the wealthy, you are affecting middle-income America,” Jim Hamilton, president of the California Association of Realtors, told a reporter.

Added Democratic U.S. Sen. Dianne Feinstein, “The proposal would impact nearly the entire state, and worse, those living paycheck to paycheck may be forced to sell their homes. To put it simply, a family who purchases a median-priced home in California would face a loss of $6,727 a year in tax deductions. I support tax reform, but it should not be on the backs of Californians.”

By contrast, switching the mortgage deduction to a capped credit would not hurt Texas a bit, as median home prices there remain below $250,000.

The most remarkable part of all this has been the utter silence of Governor Arnold Schwarzenegger, who frequently notes that Californians don’t want any tax increases. He ought to realize they especially don’t want a huge increase that would bring them nothing in return, but only add to the longstanding imbalance between what this state pays in federal taxes and what the federal government spends here.

Even after stumping the state campaigning as “the people’s governor” for his defeated special election initiatives this fall, as of mid-November Schwarzenegger had not uttered so much as one word about the threat to his state’s middle class. He ignored a written request from Democratic Rep. Charles Rangel of New York to weigh in against the tax changes.

And he pointedly declined to meet with Bush during the President’s brief mid-October sojourn in Southern California, thus missing an opportunity to make some direct input on behalf of those who elected him. For this tax hike would respect no political boundaries, hitting Republicans as hard as Democrats.The bottom line: Someone has to act quickly to protect California taxpayers, or they will be paying a heavy added price for years to come and getting nothing new in return.

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