Washington Mulls End-Run of New State Tax Deduction Cap

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By Paul Shukovsky

Washington state lawmakers are considering a bill to reduce the federal tax burden on individuals and businesses emanating from the new $10,000 cap on the federal deduction for taxes paid to state and local governments.

The legislative response to the federal cap by Washington state—which has no income tax—is unique among the states because H.B. 2853 provides relief to taxpayers by potentially granting a retail sales-and-use tax exemption, research analyst Savannah Gilmore of the National Conference of State Legislatures told Bloomberg Tax Jan. 30. Other states considering such a bill provide personal income tax credits, she said.

The bill would create a scholarship account called the Washington Excellence Fund to which taxpayers may donate in return for a sales-and-use-tax exemption certificate in the amount of their donations to be used for taxable purchases over $150,000, which must be given to the seller at time of purchase.

The bill’s legislative intent section says that, in addition to providing taxpayers relief from the newly increased federal burden, the bill seeks to keep Washington competitive with other states that do not have a state sales tax for large capital purchases.

The bill is among a number of controversial approaches that California and other high-tax states controlled by Democrats are trying to get around on the new cap, such as replacing income taxes with an employer-based payroll tax system. The new federal tax act ( Pub. L. No. 115-97), signed by President Donald Trump in Dec. 22 2017, allows taxpayers to deduct up to $10,000 of property taxes, and state and local income or sales taxes. Previously, the deduction had no limit.

‘Questionable Attempt’

The Washington state measure’s sole sponsor is Rep. Jeff Morris (D), whose office declined to make him available for an interview or provide a statement on the bill. A legislative staff member who spoke on the condition of anonymity said no one had yet come forward either in favor or in opposition to the bill in advance of its first public hearing, scheduled for late Jan. 30.

The bill “appears to be another questionable attempt by lawmakers in certain states to circumvent changes in federal tax law,” Patrick Connor, Washington state director and lobbyist for the National Federation of Independent Business, told Bloomberg Tax Jan. 29. “We’re not likely to take a position on this one. I don’t know if it has legs. I don’t see a direct benefit to the vast majority of small business owners in Washington state.”

California legislators advanced Jan. 30 a similar bill, SB 227, which would provide personal income tax credits in return for contributions to the California Excellence Fund, Gilmore said. Illinois, Nebraska, and Virginia are also considering similar bills, she said.

To contact the reporter on this story: Paul Shukovsky in Seattle at pshukovsky@bloomberglaw.com

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

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