TaxProf Blog

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

Wednesday, July 18, 2018

Red State Charities Could Be Collateral Damage From The GOP's War On California's High Taxes

Los Angeles Times, Red State Charities Could be Collateral Damage From the GOP's War on California's High Taxes:

[There are] more than 100 charitable tax-credit programs in dozens of states — including red ones such as Alabama, Georgia, South Carolina and Louisiana — that could be collateral damage in a dispute between Republicans in the nation’s capital and leaders of Democratic-controlled states, including California. ...

The Internal Revenue Service is preparing to block attempts by lawmakers in California and other high-tax states to help residents avoid a new $10,000 limit on the deductibility of state and local taxes that was included in the tax overhaul enacted late last year.

Republicans complained that the deduction is an indirect subsidy to some state and local governments and shifts money from lower-income people in low-tax states to higher-income earners in high-tax states.

But Democrats contended that the limit was a politically motivated move designed to reduce the cost of the tax overhaul’s deep cuts in rates for businesses and individuals by targeting high-tax states where the Democratic Party is strong.

Californians received one-fifth of the total value of the deduction nationwide in 2014, according to the Tax Foundation, a conservative-leaning research organization. And of the top 10 states for the deduction, including New York, New Jersey, Illinois and Texas, President Trump carried only three in the 2016 election.

To circumvent the cap, legislation is pending in California and has been adopted in New York, New Jersey and Connecticut that would allow taxpayers to claim a charitable deduction to help offset state and local tax payments above the new limit.

The problem, according to some tax law experts, is that it will be very difficult for the IRS to prohibit efforts designed to circumvent the state and local tax-deduction limit without also disallowing the federal tax deduction for contributions to programs such as the Alabama Opportunity Scholarship Fund.

“There’s really no difference between what these existing programs do and what the new ... programs do,” said Kirk Stark, a UCLA law professor who has studied the issue.

He and seven other tax experts released a 44-page research paper in January arguing that states would be allowed to turn state and local tax payments into charitable contributions based on previous IRS rulings and court opinions [Joseph Bankman (Stanford), David Gamage (Indiana), Jacob Goldin (Stanford), Daniel Hemel (Chicago), Darien Shanske (UC-Davis), Kirk Stark (UCLA), Dennis Ventry (UC-Davis) & Manoj Viswanathan (UC-Hastings), Federal Income Tax Treatment of Charitable Contributions Entitling the Donor to a State Tax Credit, 159 State Tax Notes 159 (2018) (review here)].

“It’s not just a kooky, crazy idea,” Stark said. “It’s something these states have been doing for many years and it’s been benefiting their taxpayers.”

So any attempts to change regulations or alter the law could ensnare existing charitable tax credit programs.

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