California is a “donor” state. Each year, we pay more — lots more — to the federal government in taxes than the state receives in return.
Californians, on average, paid about $29 billion more a year in federal taxes than the state received over the past decade. That’s the largest imbalance in the nation.
By contrast, there are about 30 states that receive more money from the federal government each year than their residents pay the IRS. A large portion of the extra money these 30 states receive comes from the federal taxes Californians pay.
In other words, California “donates” billions of dollars each year to about 30 other states.
Californians are increasingly aware of this imbalance and frustrated about it. When I talk to voters, it’s a topic that comes up often: “Can California send less money to the federal government?”
As chair of the Senate Revenue and Taxation Committee, I decided last fall to start examining ways that California could address this problem. I met with several tax experts and began devising potential solutions.
It’s important to note that the State of California doesn’t pay taxes to the federal government – rather, individual California taxpayers do. And individual taxpayers can’t start paying fewer taxes to the IRS – not without getting in legal hot water.
So, any solution we came up with would have to legally reduce Californians’ federal tax payments.
We hashed out a few ideas and settled on an innovative one that could work. If enacted, it will reduce Californians’ federal tax burden by up to an estimated $250 million annually. Plus, it would provide Californians with a tax incentive to buy a new car, truck, or other motor vehicle.
Our idea, Senate Bill 1275, would eliminate the state sales tax you pay when buying a motor vehicle and replace it with a one-time vehicle license fee of an equal amount that is federally tax deductible.
Here is how it would work: If you buy a car and the state sales tax is $2,000, you would still pay $2,000 (plus the cost of the car). But the $2,000 would be a one-time vehicle license fee rather than a sales tax. So, your out-of-pocket cost would be the same as it is now.
The state would receive the same amount, too: The $2,000 fee would go to the state’s general fund, just like state sales taxes do.
However, California taxpayers can’t claim an itemized deduction for sales taxes, but they can for a vehicle license fee. So, you could pay less in federal taxes.
A few things to note: SB 1275 would have no impact on the state budget, nor would it reduce local tax revenues because the one-time vehicle license fee would only replace the state’s portion of the sales tax, not any local sales taxes. The bill would sunset in five years.
In sum, under SB 1275, Californians who buy a car or truck would get a federal tax break that they don’t currently receive. And the amount Californians send to the federal government each year would drop by up to a quarter billion dollars.
California would still be a donor state – but the imbalance would be smaller.
Plus, SB 1275 could boost auto sales, while not costing consumers, the state, local governments or car dealers a penny.
Sen. Jerry McNerney represents Alameda County’s Tri-Valley and all of San Joaquin County. He is chair of the Senate Revenue and Taxation Committee.
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