Blue States Exploring Ways Around New Tax Law
LA Times calls these proposals “unwise” and “tax-dodge gimmickry”
When President Trump signed the tax bill into law, Democrats, particularly in blue states with high state income taxes, wailed. The Nation declared the new tax law “a deliberate attack on blue states,” and New York governor Andrew Cuomo called it an “attack only on blue states” and “economic civil war.”
Among the attacks they perceive is the new law’s $10,000 maximum for all state and local deductions. Oddly, the left is howling because this is, as Vox points out, “effectively raising taxes on wealthy people.”
Setting aside the fact that taxing the rich has been the leftist mantra for decades and became particularly shrill during the Obama administration, blue states are now actively looking for ways to get around this and other measures in the new tax law.
In New Jersey and California, top Democratic officials want to let people make charitable contributions to the state instead of paying certain taxes. In Connecticut and New York, officials are exploring a switch from income taxes to new ones on payroll. A few governors have even called for tax cuts.
The ideas are bubbling up as state lawmakers begin their 2018 sessions and assess the effects of the Republican tax overhaul that President Donald Trump signed into law last month. Lawmakers and governors in some states are grappling with how to protect their constituents.
The federal policy implements a maze of changes. It cuts tax rates and nearly doubles the standard income deduction. Yet it also caps or eliminates some popular itemized deductions, and sets the personal exemptions to zero.
For many Americans, the result is expected to be lower federal tax obligations, at least initially. Those facing higher bills are expected to be concentrated in some high-tax states.
With legislators starting their sessions and governors writing state budgets, the response is a political priority. The proposals are bold, though not yet fleshed out.
. . . . This week, New York Gov. Andrew Cuomo used his state-of-the-state speech to pledge to sue over the GOP tax plan, which he called “an assault” by the federal government. A lawsuit would add taxes to the growing list of Trump administration policies that Democratic states have challenged in court.
Other states have not committed to sue, but some leaders have indicated they’ll explore the idea.
“I’m certainly not a constitutional lawyer, but the notion that this is not constitutional is something we want to pursue,” said Phil Murphy, New Jersey’s Democratic governor-elect.
Officials in California and Connecticut also said this week they were considering legal options.
In addition to filing law suits in response to the new tax law, blue state governors and lawmakers are looking into allowing people to make “charitable donations” to the state instead of paying income taxes.
The AP continues:
In high-tax states, officials have been focused on protecting taxpayers from the impact of a new $10,000 cap on deductions for paying state and local taxes. In California, Connecticut, Massachusetts, New Jersey and New York, more than one-third of tax filers claim the state and local tax deduction on federal taxes; the average deduction in each state is over $15,000.
California state Senate President Pro Tem Kevin de Leon, a Los Angeles Democrat who is running for the U.S. Senate, introduced legislation this week that would allow people to make charitable donations to the state instead of paying income taxes. That would allow them to claim a charitable deduction on federal taxes.
Other blue states with high income taxes and/or sales taxes are looking at other options, as well.
Another Democrat, New Jersey Gov.-elect Phil Murphy, announced a similar plan on Friday but said local governments also could implement it and apply it to property taxes.
Kim Rueben, a senior fellow at the liberal-leaning Urban-Brookings Tax Policy Center, said it remains to be seen whether the IRS would allow deductions for that kind of contribution if it’s rewarded with tax credits. There is some precedent for it, though: She noted that some states give tax credits in return for private-school scholarships and that the IRS allows deductions of those contributions.
In Connecticut, two Democratic legislative leaders want to replace income taxes on individuals with payroll taxes on employers.
While some of these ideas may sound like they are protecting the wealthy taxpayers of these blue states, some like higher payroll taxes on employers may actually hurt the middle classes who would otherwise see the benefits of the new tax law in their paychecks. Others are “gimmicky” and smack of tax evasion.
The Los Angeles Times editorial board explains:
. . . . [S]tate lawmakers aren’t ready to accept the hand that Congress has dealt; instead, they’re looking at ways to change their own tax codes to help their residents evade the higher federal levy.
Their outrage at the slap from Washington is understandable; it seems hardly coincidental that congressional Republicans would target a deduction that matters most to blue states. But rather than respond with real tax reforms of their own, they’re resorting to tax-dodge gimmickry.
A case in point is the proposal Senate President Pro Tem Kevin de León (D-Los Angeles) unveiled Jan. 3 in California. De León would enable residents to contribute money to a new “California Excellence Fund” in exchange for an equal amount of tax credits — for example, a family that owed $4,000 in state taxes could contribute $4,000 to the fund and wipe out its state tax bill. They could then deduct their contribution to the fund from their federal taxable income, just as they used to do with their state tax payments. That’s because the new federal tax law leaves the deduction for charitable contributions intact, unlike the one for state and local taxes.
The Internal Revenue Service has blessed similar arrangements that California has used to raise money for college scholarships, and that several states use to preserve land from development or generate money for private school vouchers. But it’s one thing to offer a tax break to try to support a public project or service; it’s another to do it solely to cut Californians’ federal tax bills. Passing the De León bill would be the state’s version of setting up a shell company in the Cayman Islands in order to shelter Californians’ income.
Ultimately, the LA Times‘ editorial board notes, there are more winners than losers in the GOP tax law.
It’s worth remembering, though, that the deduction for state and local taxes was just one of many breaks for individual taxpayers that were eliminated or scaled back as a trade-off for a considerably larger standard deduction — a change that will benefit most taxpayers. Nationally, less than a third of households itemize deductions, although the percentage rises dramatically among those who earn more than $75,000 a year. In California, only 34% claimed a deduction for state and local taxes on their 2015 returns. It’s safe to assume that the other 66% will come out ahead under the new law.
In short, the new tax law produces winners and losers, as big changes in the tax code invariably do. . . . Californians deserve a better tax overhaul than Congress just delivered, as do all Americans, but this isn’t the way to get one.
When you’ve lost the LA Times . . . .
Donations tax deductible
to the full extent allowed by law.
Dude, shared responsibility.
Wow. I was a bit worried how the details of the new federal tax bill would work out in high tax rate states and cities but now that I know there is a $10,000 cap and not just a blanket no state and local deduction this is a bigger win than I imagined.
It is going to be a hard sell to the majority of the tax payers that this is a bad idea. The false narrative that only the rich benefit is patently absurd.
From the AP article: “A few governors have even called for tax cuts.”
THAT was the intent. Now, state officials will have to consider the $10K cap when raising state and local taxes. This means that [gulp] some government belt tightening and ‘living within means’ may very well result.
“for example, a family that owed $4,000 in state taxes could contribute $4,000 to the fund and wipe out its state tax bill. ”
If you can wipe out your state tax bill because of your contribution, then you can not deduct that as a charitable donation. If you receive ANYTHING of value in exchange for a donation, you must deduct the value of the benefit from your donation. So if you pay $4000 to the charitable fund and that allows you to wipe out a $4000 tax bill, your net charitable deduction is zero.
Not rocket science.
Careful. There is a net effect difference between a ‘tax credit’ of $4000 and a ‘Tax deduction’ of $4000. Only a tax credit will negate a $4000 tax obligation.
Of course the logical solution is for voters in the blue states to stop voting for politicians who constantly raise taxes and put in place restrictive laws and regulations. They need to vote for representatives who will lower taxes and promote growth of business. But of course we know that the majority have an appetite for cool aid that will never be quenched. Even the average Joes in these states seemingly are happier complaining about a President who is actually doing something to help them than look at what they have done to themselves by constantly voting for those who would raise taxes & block the path to decent employment for the majority of those wanting to work.
Except that, as the post points out, the IRS does allow this for contributions to scholarship funds and to land conservation funds that come with state tax credits attached. Perhaps it will distinguish them, or perhaps it will start disallowing those too.
The school donations do not benefit the individual taxpayer and are therefore allowed. What CA is proposing would not be allowed by the IRS since the individual is directly benefitting. This is charity donation 101…..I think the CA democrats must not have much practice.
well said, danvillemom. If by donating, the donor receives a direct benefit of value, then they have to deduct it, because it is not “charity”. The donor does not directly benefit from donating to conservation funds. I don’t know if they are talking about scholarship funds specifically for the donor or to scholarship funds in general (for their children, grandchildren etc.) But the law may have been written for that.
As for wiping out a tax bill in EXCHANGE for your donation, the law is VERY, VERY, VERY clear that is not allowed.
The school donations do benefit the individual taxpayer, in exactly the same way that these do — the taxpayer gets a credit against his state taxes. And yet the IRS apparently allows it, presumably because Congress likes the program. In this case Congress won’t like it, so I can’t see the IRS being so accommodating.
danvillemom and elle, what parts of these quotes in the post is unclear?
The taxpayer gets a tax credit in return for the donation, and yet is allowed to deduct it. Why does the IRS allow this? I don’t know, but I imagine it’s because Congress sees these arrangements as a good thing, so it lets them slide. That won’t be the case here.
Michigan used to give a tax credit for contributions to Public Radio and universities. While you could make a stretch and say they benefited the taxpayers, these donations were completely voluntary and the amounts were by choice. For the CA tax credit scheme to work, the State would calculate the “donation” amount and force the payment. See my post below. If the “donation” was truly voluntary in amount and timing, I guarantee nobody would pay it, especially people who don’t even itemize due to the new doubled standard deduction.
BTW, Rick Snyder, the One Tough Nerd governor, nixed those tax credits when he got into office and cleaned up Granholm’s mess.
If taxpayers got a credit in return for their donations, then how can you call it a stretch to say they benefited? Every dollar of credit is a direct benefit, which strictly speaking ought to directly reduce the deductible portion of the donation, but that was never enforced, was it?
For the CA tax credit scheme to work, the State would calculate the “donation” amount and force the payment.
How so? It would work exactly the same way the Michigan program worked. You decide how much to “donate”, and in return you get a matching credit against your state taxes. Donate $5K, get a $5K credit; donate nothing, get no credit. How does that not work?
If the “donation” was truly voluntary in amount and timing, I guarantee nobody would pay it, especially people who don’t even itemize due to the new doubled standard deduction.
Of course those people wouldn’t donate. Where did you get the idea they’d be expected to? They would just pay their full state taxes in the normal way. So would those who do itemize, but whose state & local taxes add up to $10K or less. This phony “donation” scheme only affects those whose state & local taxes add up to more than $10K. They would be able to reduce that by “donating” some of it to this “fund” instead of paying it directly to the state treasury. It should work, so long as the IRS ignores the tax credit, as it does in the other instances. But I don’t think there’s even a small chance that it will.
There is a slight hiccup in California’s tax scheme. The IRS must approve 501(c)(3) status. A scheme to defraud the United States of tax revenue would not qualify for 501(c)(3) status.
Is Lois still around?
Is Lois still around?
Charitable donations to the state?
#1 I don’t see the IRS and the rest of the Federal Government accepting that lower forms of government such as states, counties, and cities qualify as charities. I can see these donation deductions being denied.
#2 What do these states that implement such a thing do when people donate less or stop donating at all to the government? Are they going to force charitable donations? That would be a real blast to see them in court trying to force that one through.
Of course, with chariable status comes paperwork and “ownership” by the federal government.
How could a “charitable contribution” wipe out a tax debt. I live in Texas so I don’t pay a state income tax. But when I claim a deduction for my property tax I have to document my claimed deduction by providing the assessment.
It seems simple to me, but maybe somebody who lives in a state where you have to pay income tax can help me out. If your combined income and property tax are above $l0k then wouldn’t you have to pay taxes on the amount that exceeds the allowed federal deduction. Why would the feds fall for this trick? The IRS isn’t going to start issuing forms to accommodate this illegal maneuver.
There won’t be a new block for “charitable contribution to the state in return for wiping out your SALT bill.” It seems to me these states are setting up their citizens for tax evasion penalties and possibly criminal charges.
The only way they could legally do this is if they made paying any amount above the federal limit on SALT truly voluntary.
I don’t understand your confusion. It’s very clearly explained: for every dollar you “donate” to the “Excellence Fund” you get a dollar tax credit. So if your state tax bill is $7K and your local tax bill is $4K, you can give $1K to this “fund” and get a $1K credit against your state taxes, bringing the total for state & local down to $10K. On your federal taxes you deduct that $10K for state & local taxes, and the $1K as “charity”.
Why would you need a new block? Charitable contributions are already deductible. You just include your “contribution” to the “Excellence Fund” together with all your other contributions.
Nope. It works, so long as the IRS ignores the tax credit you get for the donation, and doesn’t count it either as an offset against the deduction or as income. That’s where the big flaw is. The IRS has played nice with tax credits for scholarship funds & land conservation, presumably because Congress approves of those things and wants to help. It will not play nice with this scheme, or Congress will put an end to it.
“Why would you need a new block? Charitable contributions are already deductible. You just include your “contribution” to the “Excellence Fund” together with all your other contributions.”
Simple. These taxpayers would still have to report their actual property tax assessment and their actual state tax bill. That “Excellence Fund” may be tax deductible at the state level, but at the federal level they still will only be able to deduct a maximum of $10K and anything over that is still part of their taxable federal income.
Um, no. How are you not getting this? It’s very very simple. Donations to not-for-profits that benefit the public, including this “Excellence Fund”, are fully deductible from federal income taxes. There is no cap on them. That’s the whole point. How could you have missed it? People whose state & local tax bill is higher than the new $10K cap will “donate” the extra to this “fund”, and deduct that donation from their federally taxable income. Meanwhile, as a reward for their donation, they’ll get a dollar-for-dollar credit for their “donation” to apply against their state taxes.
Suppose your local taxes are $5K and your state taxes are $8K. That comes to $13K, but you can now only deduct $10K. So you “donate” $3K to the “Excellence Fund”, get a $3K receipt which you list together with all your other donations, and your state tax bill is reduced to $5K.
Of course this only works if the IRS lets you deduct the $3K “donation” even though you got something worth $3K in return, i.e. a state tax credit. That’s not supposed to be allowed. The IRS has allowed it for donations to scholarship funds and land conservation funds, so CA is hoping it will do so here too. I think that’s a futile hope.
Ha! Lefties ESCHEW charitable contributions! I want to see how this hair-brained scheme works out for them!
First of all, it’s not true that lefties don’t give anything. It’s true that on average they give less than righties do, but they still give.
Second, that’s irrelevant. No lefty has any principled objection to charitable donations (or to much else), so if it comes with a matching tax credit why would they not do it?
1. I don’t think the IRS gets a choice in the matter. If the state sets up a charitable fund it’s entitled to not-for-profit status.
2. Um, what are you not getting? If people don’t donate they don’t get the matching tax credit. It’s entirely up to them whether they want it. Obviously people whose state and local tax bill comes to less than $10K won’t bother, while those with a higher bill will “donate” because they want the credit.
The flaw here is the assumption that the IRS won’t count the tax credit as income, just because it doesn’t do that for scholarship funds and land conservation funds. I think that’s a very shaky assumption.
Of course the IRS doesn’t have a choice. Unless the state sets up a federally recognized charity then donations don’t count as charitable donations for federal tax purposes.
Just like a donation to any other organization that isn’t a federally recognized tax-deductible organization doesn’t reduce your federal tax obligation.
As you said, the IRS doesn’t have a choice. The taxpayer still owes the money to the feds.
You’ve got it completely backwards. The IRS has no choice but to recognize the Excellence Fund as a deductible charity. The law defines the criteria for deductible status, and the “Excellence Fund” fits them perfectly.
“The term charitable is used in its generally accepted legal sense and includes relief of the poor, the distressed, or the underprivileged; advancement of religion; advancement of education or science; erecting or maintaining public buildings, monuments, or works; lessening the burdens of government; lessening neighborhood tensions; eliminating prejudice and discrimination; defending human and civil rights secured by law; and combating community deterioration and juvenile delinquency.”
You are confusing not-for-profit with tax deductible charity. Those two aren’t the same thing.
Not-for-profit doesn’t even mean the organization can’t turn a profit (i.e. take in more money than they spend). It simply means the organization can’t distribute profits like a for-profit corporation.
Many if not most health insurance companies are set up as not-for-profit organizations. They can run a surplus every year of their existence if you prefer the term surplus to profit. That money can only be used for certain purposes, but what it can’t be used for is to enrich the principals. Although, not-for-profit corporations can and do provide lavish salaries and benefits to corporate officers.
But you can send a check to Kaiser-Permanente or Blue Cross/Blue Shield (not all are necessarily not-for-profit corporations depending on how they are organized in each state, but most are) and see if the IRS will let you deduct it as a charitable donation. They won’t; those corporations aren’t tax-deductible charities.
No, not all not-for-profits can accept tax-deductible donations, but all not-for-profits that benefit the public can. The IRS has no discretion in the matter.
So blue states want to make income taxes voluntary now? I like that idea!
That’s the other gotcha in this scheme–state taxes will be paid, either with money or these new tax credits. So the state of California is creating a blatant tax evasion scheme.
I wonder who will be dumb enough to go first.
No, they’re not making it voluntary. Where’d you get that idea? You have to pay the same amount regardless; the only choice you get is how much of it you pay directly, and how much you “donate” in return for a matching credit.
They would HAVE to make it voluntary for this to work. If it is NOT voluntary then you are receiving a DIRECT BENEFIT in exchange for your donation. The law is clear.
The IRS doesn’t care if the California sets up a charity or not, it is irrelevant! I can’t donate $4000 to a charity (pick one, any one) and then that charity donates $4000 to my charity. Why, because it is tax fraud. I can’t pay $4000 to a charity that then gives me cash or a car worth $4000 in EXCHANGE for my donation.
If you go to a charity auction and you pay $100 for your ticket, you have to deduct the cost of the meal, entertainment, and even the flowers on the table. Why? Because the IRS says you benefit from the meal, the entertainment and the pretty flowers on your table. The charity that puts it on calculate that cost and then deducts it from the tax receipt they send to you.
You can’t do it Milhouse. It’s clearly illegal.
There are lots of ways that many people and businesses take advantage of non-profits for tax benefits that are legal and that benefit society as a whole. But if California sets it up so that it is a clear quid-pro-quo, then it is not legal.
And yet apparently the IRS allows it for the scholarship and land conservancy funds. I completely agree with you that it’s unlikely to allow it this time; if there are complaints it will just stop allowing it in those cases either.
You are right. Someone will take note now that attention has been called to it and demand they stop. Especially those scholarship funds! That’s too bad.
Let me remind our lefty friends about that time when Obamacare became law through all sorts of shenanigans.
This is what the then WH tweeted,
It’s. The. Law.
“….The Nation declared the new tax law “a deliberate attack on blue states,” and New York governor Andrew Cuomo called it an “attack only on blue states” and “economic civil war.””
I think this is accurate and a brilliant tactical move from Trump & Co. It will place a burr under the saddle of the influential and high rollers in these high tax, debt ridden blue states, riddled with irresponsible fiscal policy.
When persistently irritated by a tax burden which cannot be shrugged off by writing off to the Feds, I think there will be great wailing and gnashing of teeth to demand their respective state legislatures scale back those costs and the taxes which pay for it. It may take many years for it to have a great effect, and some states will be recalcitrant out of spite, but the taxes will move downward.
As for ‘attack only on blue states’ and ‘economic civil war,’ DOH! No kidding. It’s why you leftist tools are wailing and gnashing your teeth. The scam has been revealed and your gimmicks made impotent.
Rather than calling it “..a deliberate attack on blue states”, it might be rephrased as ” …cutting tax loopholes wealthy people in blue states now use.”
“Tax the Rich”…. well their response has been “rich”. Phonies.
Time for the federal government to fix the public employee pension disaster that’s just over the horizon. Require those providing pensions to every year purchase annuities that cover that fraction of an employee’s pension upon retirement. So with a 30 year pension the employer must purchase an annuity that will pay 1/30th of the employee’s pension. This will guarantee pensions and ensure that those who provide pensions will pay them instead of someone 30 years down the road.
I know… let’s “right size” municipal pensions. Recall that Valerie Jarrett was a (no joke) part-time employee of some Chicago entity – Chicago Transit, I think – and walked away with a huge pension. There are school administrators in Illinois, NY and California retiring on six-figures, tax free, when they’re in their late 40s, early 50s!
Meanwhile, the rest of the working schmucks must play the 401K game and look forward to about $2K a month in Social Security at age 67, or so.
They were passing the cost of local taxes on to the rest of the country. How noble – helping Peter by stealing from Paul, and getting self-righteous about it.
Exactly. Not the whole cost, or even most of it, but enough of a chunk that losing it hurts them. Which is the whole point. If the IRS holds tough on these schemes, they’ll be forced to actually reduce taxes.
What will Kalifornia do when they are bankrupt? Hmm?
For their monetary bankrupcy, they will turn to the Feds for help…as for their moral bankruptcy ..there is no hope or help.
Lots of wishful thinking about this tax credit. I’d put the money away because you will be paying unless the tax laws are re-written. Fat chance that the the low income states will vote to pay tax credits for those with million dollar properties.
I think this is exaggerated by the blue state governors. Tax rates have been reduced. Many people from blue states have been dropped from the AMT. There is still a $10,000 deduction. Very few people will be negatively affected.
The issue is not the burden but rather the incentives going forward. As to the burden, state and local taxes can be shifted from those who are hurt to those who are benefited, with a net reduction for all.
While it’s easy to assume that Leftist governments are charities, there is a problem that exists in another part of the new tax law. For years, elite college athletic programs have required payments for seat licenses to season ticket holders which were deemed charitable contributions.
The new tax law ends this deduction partially under the logic that you are forced to do it in order to get season tickets.
While you would not be forced to pay the donation to Sacramento, you would be getting something of equal value in a tax savings (same as if you buy a signed football at a charity outing with a value of $100 and you pay $100, you get no charitable deduction).
In other words, people who don’t make the “donation” have to pay taxes while people who do pay the “donation” would not.
The only way to get around this would be to force everybody pay the “donation” and then make California an income tax free state. Since there’s no income tax savings, there’s no value received. Like the seat license donation, under prior law the “donation” would be deductible.
So, just like the mandatory seat license for 50-yard line football tickets, forcing somebody to make a donation eliminates it’s deductibility since it is no longer voluntary.
There is a solution – Instead of the state calculating and forcing the donation, make the state income tax zero and let everyone decide how much they want to voluntarily pay. I bet revenue would drop to a small fraction as all those altruistic tree hugging Leftist show their true colors.
Keep in mind that this includes local and property taxes too.
No doubt they’ll take it to the Federal courts in California or Alaska and then appeal it to the 9th District Appeals Court where they rubber stamp everything anti-Trump. It’ll then be reversed by the SCOTUS before the ink is dry, like most cases are that come out of the 9th.
If you’re giving money to the government, it’s not charity. Trump needs to make the IRS understand that clearly.
You are wrong. Giving money to the government absolutely is charity. That is the law, and Trump has no power to tell the IRS otherwise.
However, if you get something in return for your donation you’re supposed to reduce the donation’s deductibility by that amount. The IRS doesn’t always enforce this, but I think the chance that it won’t in this case is very low.