California, New York Could Recast Taxes as Charitable Gifts

Daily Tax Report: State provides authoritative coverage of state and local tax developments across the 50 U.S. states and the District of Columbia, tracking legislative and regulatory updates,...

By Che Odom

California, New York, and other high-tax states may recategorize taxes as charitable contributions as a way around the GOP’s limit of a popular break.

Under the new GOP tax plan, taxpayers who itemize will be allowed to deduct up to $10,000 of state and local taxes paid—property taxes and either income taxes or sales taxes. Currently, taxpayers may deduct state and local taxes without limit.

The cap is expected to hit taxpayers in New York, Connecticut, California, and New Jersey the hardest, but that could change.

States could, in essence, accept charitable contributions instead of taxes, and those contributions would be deductible on federal returns.

University of California Hastings College of the Law Associate Professor Manoj Viswanathan told Bloomberg Tax that taxpayers in high-tax states could take advantage of state-level initiatives that would reclassify state and local tax payments as federal charitable donations, allowing them to “double dip” and obtain state and federal tax benefits from a single donation.

The state and local deduction is one of the largest single revenue sources in the GOP tax bill, which passed both houses of Congress but still faces a procedural vote in the U.S. House Dec. 21. President Donald Trump Dec. 20 declared victory after it passed the Senate, saying it not only lowered taxes but essentially repealed the Affordable Care Act by ending the penalties for those who don’t have health insurance.

Legal Challenge?

In October, California Gov. Jerry Brown (D) and New York Gov. Andrew Cuomo (D) said in a call with reporters that their states might consider a legal challenge if the deduction is repealed or limited. Calls to the governors’ offices Dec. 20 weren’t immediately returned.

Limiting the SALT deduction could affect as many as 6 million Californians—one of every three taxpaying households in the state—according to state Finance Department Director Michael Cohen.

Immediate Criticism

Americans Against Double Taxation—a coalition of state and local government groups, realtors and other organizations that fought for the full deduction—told Bloomberg Tax in an email Dec. 20 that the tax bill “overturns more than 100 years of sound tax policy that protected taxpayers from double taxation.”

New Orleans Mayor Mitch Landrieu (D), president of the U.S. Conference of Mayors, said in an emailed statement that his organization’s support of the deduction helped avert “full elimination,” but criticized the tax bill’s repeal of the individual mandate under the Affordable Care Act.

The bill “will make our cities harder to live in and harder to run effectively—all for the benefit of wealthy political donors,” Landrieu said.

To contact the reporter on this story: Che Odom in Washington at codom@bloombergtax.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bloombergtax.com

Copyright © 2017 Tax Management Inc. All Rights Reserved.

Request Daily Tax Report: State