19 Jun 19
Orange County Register
It did not escape the notice of the Internal Revenue Service that the state of California was trying to evade federal income taxes.
New York and New Jersey caught the attention of the IRS, too.
The tax dodge that raised the red flag for a number of high-tax states was the “charitable fund,” the type that is set up for the purpose of allowing state taxpayers to deduct more than $10,000 of the state and local taxes they pay to their rapacious and grasping state and local governments.
The $10,000 cap on deductions for state and local taxes hit California, New York and New Jersey particularly hard, given the high state income tax rates. California leads the nation with a top marginal tax rate of 13.3 percent. The property taxes, even under Proposition 13, can be shockingly high due to the skyrocketing prices of homes and other real estate.
The tax-cut bill signed by President Trump in 2017 has made life difficult for politicians in high-tax states who want to raise taxes further, because they can no longer tell taxpayers, “Don’t worry, you can deduct it on your federal tax return!”
I personally heard from taxpayers in the Los Angeles area that they would vote no on Measure EE, the proposed parcel tax increase that was on a special-election ballot recently, because their property taxes were quite high enough, thank you, and they couldn’t deduct it any longer.
Measure EE went down to a resounding defeat.
After the 2017 tax bill was enacted, many states tried to set up a SALT-cap workaround. In California, two bills were authored by then-state Sen. Kevin De León, D-Los Angeles, who ran unsuccessfully against Sen. Dianne Feinstein for the U.S. Senate.
One bill would have created a charity called the “California Excellence Fund” within the state’s general fund. “Donations” would earn the donor a dollar-for-dollar credit on state taxes, and that would transform a required state tax payment into a charitable contribution that was fully deductible on the taxpayer’s federal income tax return. The bill was modified to be slightly less noticeable, but the IRS noticed anyway.
About a week ago, the IRS issued new regulations that limit the federal deduction to an amount equal to the difference between the state tax credits taxpayers get and their charitable donations, making these donations a lot less useful to people trying to reduce their federal tax liability.
The IRS also issued a new regulation to allow “safe harbor” for taxpayers who have participated in some state and local programs that offer tax credits for donations to certain non-profit organizations. This may save some state programs that offer tax credits for donations to charities that support school vouchers.
It’s a difficult needle to thread, and it may all be challenged in the courts. New York Gov. Andrew Cuomo said his state is looking at the legalities. “We need Congress to reverse it,” he said.
But Democrats in the House have a political problem with this issue. The cap on deducting state and local taxes only affects taxpayers who itemize on their tax returns and are well-off enough to pay more than $10,000 per year in state and local taxes.
In other words, people the Democrats typically vilify with rhetoric such as, “the wealthy need to pay their fair share.”
The SALT workarounds were designed to make sure the wealthy residents of high-tax states paid less to the federal government. And there’s a good reason for that.
[related_articles location=”left” show_article_date=”false” article_type=”automatic-primary-section”]Taxpayers can move. Unless we’re talking about estate taxes, they’re ambulatory.
California taxpayers who would like a lower income tax rate have a choice of 49 other states. And if the wealthiest taxpayers leave, the hole in the budget will be a tourist attraction to equal the Grand Canyon.
According to data from the Franchise Tax Board, California’s top 1 percent of tax filers paid 45.8 percent of the personal income tax revenue that was collected in the state’s General Fund in 2016. And personal income tax accounts for about two-thirds of General Fund revenue.
That’s why “progressive” politicians in Sacramento were trying to lower taxes for wealthy Californians while continuing to moan that the wealthy weren’t paying their fair share.
The truth is, they’re paying a lot more than that.
Susan Shelley is an editorial writer and columnist for the Southern California News Group. Susan@SusanShelley.com. Twitter: @Susan_Shelley.