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Tax Reform and the California Economy

November 14, 2017
By Robert A. Dye, Ph.D., Daniel Sanabria

It looks like the policy uncertainty coming out of Washington will continue into year end. At the start of 2017 we were talking about the possibility of disruptions to complex supply chains for state manufacturers from changes in U.S. trade policy. Then we discussed the impact of immigration policy on a substantial portion of the California population. Now a new uncertainty looming for Californians heading into 2018 is the tax reform bill. The 429 page Tax Cuts and Jobs Act bill released by House Republicans and the corresponding package by Senate Republicans may increase the cost of living in high tax states, like California. As proposed, the House bill seeks to repeal the state and local income and sales tax deductions, while the Senate is eyeing the state property tax de-duction. Also, the mortgage interest deduction may be phased out on new mortgages ranging between $500,000-$1,000,000. This would disproportionately impact California, which had a median sale price of an existing single-family home of $555,410 in September, according to the California Association of Realtors. There may be some relief on the individual tax side with the proposed increase in the standard deduction and raising of income thresholds for other tax credits. State businesses might also benefit from lower federal tax rates. We expect tax reform to be passed before the end of 2017, but the details are not final. Even with tax policy uncertainty, the California economy remains anchored by moderate job growth. After a spring lull, the state saw a net gain of 129,000 jobs from July to September. We expect to see sustained job growth in California into 2018.

For a PDF version of this report click here: CA_Outlook_1117

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