California is a “giving” state. Each year, we pay more – a lot more – to the federal government in taxes than the state gets in return.
Californians, on average, pay about $29 billion more annually in state taxes than the state has received over the past decade. That is the biggest inequality in the nation.
In contrast, there are about 30 states that receive more money from the federal government each year than their citizens pay the IRS. Most of the additional revenue these 30 states receive comes from federal taxes paid by Californians.
In other words, California “donates” billions of dollars each year to about 30 other states.
Californians are increasingly aware of this inequity and frustrated by it. When I talk to voters, it’s a topic that often comes up: “Can California afford to send less money to the federal government?”
As chairman of the Senate Committee on Revenue and Taxation, I decided last fall to begin exploring ways California can address this problem. I met with many tax experts and started to develop possible solutions.
It is important to note that the State of California does not pay taxes to the federal government – instead, individual California taxpayers do. And individual taxpayers can’t start paying fewer taxes to the IRS — without getting into legal hot water.
Therefore, any solution we come up with will have to legally reduce the federal tax payments of Californians.
We brainstormed a few ideas and settled on an innovation that would work. If implemented, it would reduce the federal tax burden of Californians by approximately $250 million annually. Also, it would provide Californians with a tax credit for purchasing a new car, truck, or other vehicle.
Our proposal, Senate Bill 1275, would eliminate the state sales tax you pay when you buy a car and replace it with a one-time vehicle license fee of an equal amount that is federally tax deductible.
Here’s how it works: If you buy a car and the state sales tax is $2,000, you’ll 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. Therefore, your out-of-pocket costs will remain the same.
The state will get the same amount, too: The $2,000 fee will go to the state’s general fund, as will state sales taxes.
However, California taxpayers cannot claim an itemized deduction for sales taxes, but they can for a vehicle license fee. Therefore, you can pay less in government taxes.
A few things to note: SB 1275 will not affect the state budget, nor will it reduce property tax revenue because the one-time vehicle license fee will only replace the county portion of the sales tax, not any local sales taxes. The bill will sunset in five years.
Overall, under SB 1275, Californians who buy a car or truck will get a federal tax break that they don’t currently get. And the amount Californians send to the federal government each year could drop by four billion dollars.
California will still be a donor state – but the disparity will be less.
Also, SB 1275 would improve auto sales, while not costing consumers, state, local governments or car dealers a cent.
Sen. Jerry McNerney represents the Tri-Valley of Alameda County and all of San Joaquin County. He is the chairman of the Senate Revenue and Taxation Committee.
