TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Tuesday, June 12, 2018

Blue States Find Ways To Undercut GOP Tax Law

Politico, Blue States Find Ways to Undercut GOP Tax Law:

Residents of some blue states may get a surprisingly big tax cut thanks to workarounds state lawmakers are crafting to subvert a controversial new cap on deductions for state and local taxes.

In places like New York, taxpayers will not only be able to claim the same break as before Republicans imposed a new $10,000 cap on the deduction, but they will also be able to sidestep longstanding federal rules on exactly when the deduction may be taken.

“They’re actually giving them a bigger tax break than they would have gotten under the previous law,” said Dean Zerbe, a former congressional tax aide and critic of the workarounds.

It’s a little noticed and unexpected dynamic in the partisan battle over the recent tax overhaul. The new SALT cap has been one of the biggest flash points, with Democrats from high-tax states complaining they were targeted by congressional Republicans. Now, months after the law passed, Republicans are having trouble convincing voters that they’re really going to benefit from the cuts the law enacted. Meanwhile, lawmakers in blue states are magnifying the cuts with their workarounds.

States say they are merely restoring what Congress took from them. But some of the states would go beyond that, giving their residents breaks unavailable in other states. What’s more, even as Democrats lambaste the new tax law as a giveaway to the rich, their workarounds would disproportionately benefit the well-to-do because they tend to have the most state and local taxes to deduct. ...

David Kamin, a former Obama administration aide who backs the workarounds, acknowledges they go beyond restoring the old rules. But he points the finger at Congress. “It’s understandable why state leaders would potentially want to essentially give tax cuts to their population that doesn’t cost them revenue,” said Kamin, who now teaches at New York University’s law school. “That’s not to say that it makes sense for Congress to have set up that incentive,” he said, adding lawmakers in Washington need to reconsider the SALT cap.

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The workarounds, for which IRS Notice 2018-54 was meant to dissuade, are going to make for some painful litigation and individual expense. Its going to be the taxpayer that absorbs the costs, not States.

Posted by: Tom N. | Jun 12, 2018 1:35:38 PM

I think Tom is forgetting the IRS is undermanned and will not catch a lot ot the charitable deductions that are really state taxes or if they are put somewhere else. With such a low audit rate why no throw the dice?

Posted by: Sid | Jun 12, 2018 8:49:16 PM

I guess the red states should enact similar schemes so Congress will have to ban the practice.

Posted by: Tim | Jun 12, 2018 9:09:54 PM

Few of these methods will survive in the long run.

Posted by: mike livingston | Jun 13, 2018 4:19:31 AM

Hypocrites. Clearly paying your fair share isn't patriotic in Blue America. : )

Posted by: MM | Jun 13, 2018 7:30:14 AM

It won't take much to catch these. The states trying to pull this are well-known. It will only involve taxpayers with a certain level of income. The Blue states have been claiming for years that other states were undertaxing and that the Blue ones provided better (i.e., more socially responsible) services. Without acknowledging that it was being subsidized by federal tax policy, Now when a cap is being put on that, they backpedal furiously to avoid the political fallout from their own citizens for their high state tax rates.

Posted by: ruralcounsel | Jun 13, 2018 9:30:37 AM

But, but... FAIRNESS! Don't blue state politicians want fairness?

Here's why elimination of the SALT deduction is fair, according to a great communicator. No, not Obama.

President Reagan In 1985: Eliminating The SALT Deduction Will Make The Tax Code Fairer
Restoring confidence in our tax system means restoring and respecting the principle of fairness for all. This means curtailing some business deductions now being written off; it means ending several personal deductions, including the state and local tax deduction, which actually provides a special subsidy for high-income individuals, especially in a few high-tax states. Two-thirds of Americans don’t even itemize, so they receive no benefit from the state and local tax deduction. But they’re being forced to subsidize the high-tax policies of a handful of states.

Posted by: Woody | Jun 13, 2018 11:54:58 AM

Many Big Accounting firms have had members go to prison for similar activities in the last 30 years. No reason the geniuses behind these state-sponsored "workarounds" would be immune from sharing cells with their non-governmental accounting compatriots. The states proclaiming these "workarounds" will undoubtedly accompany them with uber-long tiny-print disclaimers of liability for any tax liabilities of their citizens who are silly enough follow their Dear Leaders' advice. Nor will these disclaimers have any effect on any criminal liability. So who will the the "champions" and sign on the dotted line for each of these "workarounds"? None but the brave. And CA and NY didn't just "hide" the full impact of their own state taxes, they forced the 48 states who are NOT California or New York to actually pay the shortfall for decades. These 48 states will be watching to see if CA and NY try to pick their pockets again. The litigation won't be just between the federal government and the two tax offloaders.

P.S. Politico as a tax expert? Come on. They're just joining in the fantasy, which has a powerful role in left-wing responses to Trump.

Posted by: Tiny Montgomery | Jun 13, 2018 8:22:24 PM