The college football season may be over, but lawmakers in half a dozen high-tax states are busy trying to find an end-around to dodge limits on deductions for state and local taxes imposed by the new federal tax law.
At issue is the $10,000 cap the tax overhaul law sets on federal income tax return deductions for property, income and other state and local tax levies — known as SALT. Those deductions were previously uncapped.
That’s no small change for high-tax states like California, New York, Connecticut and New Jersey, as well as the District of Columbia. According to news reports, Californians alone claim about $100 billion in SALT deductions each year — and the old unlimited deductions saved them about $20 billion in federal taxes.
The $10,000 deduction cap is less than half the average SALT write-off for Californian tax filers. So it’s no small wonder that California lawmakers are shaking the trees for tax dodges that will help their constituents — without, of course, imperiling their own tax collections.
And they have gotten creative. Legislation has been introduced to allow residents to make a “charitable contribution” in lieu of taxes to a new “California Excellence Fund” — which would be fully deductible on federal returns since those deductions were spared by Congress.
The only problem is the IRS — and Congress — would likely take a dim view of such legislative shenanigans. While contributions to a government entity are allowed as deductions under IRS codes, they must be “solely for public purposes.”
The proposed California law would have no impact on state revenues — it’s a wash — and its purpose is simply to give a financial gift to the “giver.” Tax court rulings have barred deductions if the contributor expects a substantial benefit in return.
In New York, Governor Andrew Cuomo is taking a different route and proposing the state shift from a personal income tax to a system of payroll taxes levied on employers — who would still be allowed to deduct such levies on their federal taxes.
That would be a complex undertaking that would probably require employers to lower wages to cover their higher taxes and then create a system of tax credits for employees. We can only imagine the sell job that would take: “A quick show of hands, how many of you employees would like to see their salaries lowered?”
Congress would doubtlessly be waiting in the wings to judge any such state legislation and counter it with lawmaking of its own.
Rather than pouring money down the drain looking for a loophole or contesting the IRS in tax court, the impacted high tax states might look at their own tax rate structures.
They could — and probably should — take the advice of Jared Walczak, a senior policy analyst for the conservative Tax Foundation, who said the California and New York proposals are “interesting, but unlikely to succeed for both legal and practical reasons.”
Walczak’s advice? “If high-tax states are genuinely concerned that, absent federal subsidization of their tax rates, they might see out-migration or changes in taxpayer behavior, it would be more productive to revisit state tax rates than devising increasingly convoluted ways to enable high-income earners to reduce their federal tax liability.”