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    Blue States Exploring Ways Around New Tax Law

    Blue States Exploring Ways Around New Tax Law

    LA Times calls these proposals “unwise” and “tax-dodge gimmickry”

    When President Trump signed the tax bill into law, Democrats, particularly in blue states with high state income taxes, wailed.  The Nation declared the new tax law “a deliberate attack on blue states,” and New York governor Andrew Cuomo called it an “attack only on blue states” and “economic civil war.”

    Among the attacks they perceive is the new law’s $10,000 maximum for all state and local deductions.  Oddly, the left is howling because this is, as Vox points out, “effectively raising taxes on wealthy people.”

    Setting aside the fact that taxing the rich has been the leftist mantra for decades and became particularly shrill during the Obama administration, blue states are now actively looking for ways to get around this and other measures in the new tax law.

    The AP reports:

    In New Jersey and California, top Democratic officials want to let people make charitable contributions to the state instead of paying certain taxes. In Connecticut and New York, officials are exploring a switch from income taxes to new ones on payroll. A few governors have even called for tax cuts.

    The ideas are bubbling up as state lawmakers begin their 2018 sessions and assess the effects of the Republican tax overhaul that President Donald Trump signed into law last month. Lawmakers and governors in some states are grappling with how to protect their constituents.

    The federal policy implements a maze of changes. It cuts tax rates and nearly doubles the standard income deduction. Yet it also caps or eliminates some popular itemized deductions, and sets the personal exemptions to zero.

    For many Americans, the result is expected to be lower federal tax obligations, at least initially. Those facing higher bills are expected to be concentrated in some high-tax states.

    With legislators starting their sessions and governors writing state budgets, the response is a political priority. The proposals are bold, though not yet fleshed out.

    . . . . This week, New York Gov. Andrew Cuomo used his state-of-the-state speech to pledge to sue over the GOP tax plan, which he called “an assault” by the federal government. A lawsuit would add taxes to the growing list of Trump administration policies that Democratic states have challenged in court.

    Other states have not committed to sue, but some leaders have indicated they’ll explore the idea.

    “I’m certainly not a constitutional lawyer, but the notion that this is not constitutional is something we want to pursue,” said Phil Murphy, New Jersey’s Democratic governor-elect.

    Officials in California and Connecticut also said this week they were considering legal options.

    In addition to filing law suits in response to the new tax law, blue state governors and lawmakers are looking into allowing people to make “charitable donations” to the state instead of paying income taxes.

    The AP continues:

    In high-tax states, officials have been focused on protecting taxpayers from the impact of a new $10,000 cap on deductions for paying state and local taxes. In California, Connecticut, Massachusetts, New Jersey and New York, more than one-third of tax filers claim the state and local tax deduction on federal taxes; the average deduction in each state is over $15,000.

    California state Senate President Pro Tem Kevin de Leon, a Los Angeles Democrat who is running for the U.S. Senate, introduced legislation this week that would allow people to make charitable donations to the state instead of paying income taxes. That would allow them to claim a charitable deduction on federal taxes.

    Other blue states with high income taxes and/or sales taxes are looking at other options, as well.

    Another Democrat, New Jersey Gov.-elect Phil Murphy, announced a similar plan on Friday but said local governments also could implement it and apply it to property taxes.

    Kim Rueben, a senior fellow at the liberal-leaning Urban-Brookings Tax Policy Center, said it remains to be seen whether the IRS would allow deductions for that kind of contribution if it’s rewarded with tax credits. There is some precedent for it, though: She noted that some states give tax credits in return for private-school scholarships and that the IRS allows deductions of those contributions.

    In Connecticut, two Democratic legislative leaders want to replace income taxes on individuals with payroll taxes on employers.

    While some of these ideas may sound like they are protecting the wealthy taxpayers of these blue states, some like higher payroll taxes on employers may actually hurt the middle classes who would otherwise see the benefits of the new tax law in their paychecks.  Others are “gimmicky” and smack of tax evasion.

    The Los Angeles Times editorial board explains:

    . . . . [S]tate lawmakers aren’t ready to accept the hand that Congress has dealt; instead, they’re looking at ways to change their own tax codes to help their residents evade the higher federal levy.

    Their outrage at the slap from Washington is understandable; it seems hardly coincidental that congressional Republicans would target a deduction that matters most to blue states. But rather than respond with real tax reforms of their own, they’re resorting to tax-dodge gimmickry.

    A case in point is the proposal Senate President Pro Tem Kevin de León (D-Los Angeles) unveiled Jan. 3 in California. De León would enable residents to contribute money to a new “California Excellence Fund” in exchange for an equal amount of tax credits — for example, a family that owed $4,000 in state taxes could contribute $4,000 to the fund and wipe out its state tax bill. They could then deduct their contribution to the fund from their federal taxable income, just as they used to do with their state tax payments. That’s because the new federal tax law leaves the deduction for charitable contributions intact, unlike the one for state and local taxes.

    The Internal Revenue Service has blessed similar arrangements that California has used to raise money for college scholarships, and that several states use to preserve land from development or generate money for private school vouchers. But it’s one thing to offer a tax break to try to support a public project or service; it’s another to do it solely to cut Californians’ federal tax bills. Passing the De León bill would be the state’s version of setting up a shell company in the Cayman Islands in order to shelter Californians’ income.

    Ultimately, the LA Times‘ editorial board notes, there are more winners than losers in the GOP tax law.

    It’s worth remembering, though, that the deduction for state and local taxes was just one of many breaks for individual taxpayers that were eliminated or scaled back as a trade-off for a considerably larger standard deduction — a change that will benefit most taxpayers. Nationally, less than a third of households itemize deductions, although the percentage rises dramatically among those who earn more than $75,000 a year. In California, only 34% claimed a deduction for state and local taxes on their 2015 returns. It’s safe to assume that the other 66% will come out ahead under the new law.

    In short, the new tax law produces winners and losers, as big changes in the tax code invariably do. . . . Californians deserve a better tax overhaul than Congress just delivered, as do all Americans, but this isn’t the way to get one.

    When you’ve lost the LA Times . . . .


    Donations tax deductible
    to the full extent allowed by law.


    They were passing the cost of local taxes on to the rest of the country. How noble – helping Peter by stealing from Paul, and getting self-righteous about it.

      Milhouse in reply to Fen. | January 8, 2018 at 11:04 am

      They were passing the cost of local taxes on to the rest of the country.

      Exactly. Not the whole cost, or even most of it, but enough of a chunk that losing it hurts them. Which is the whole point. If the IRS holds tough on these schemes, they’ll be forced to actually reduce taxes.

    What will Kalifornia do when they are bankrupt? Hmm?

    Lots of wishful thinking about this tax credit. I’d put the money away because you will be paying unless the tax laws are re-written. Fat chance that the the low income states will vote to pay tax credits for those with million dollar properties.

    cwillia1 | January 8, 2018 at 2:53 pm

    I think this is exaggerated by the blue state governors. Tax rates have been reduced. Many people from blue states have been dropped from the AMT. There is still a $10,000 deduction. Very few people will be negatively affected.

    The issue is not the burden but rather the incentives going forward. As to the burden, state and local taxes can be shifted from those who are hurt to those who are benefited, with a net reduction for all.

    While it’s easy to assume that Leftist governments are charities, there is a problem that exists in another part of the new tax law. For years, elite college athletic programs have required payments for seat licenses to season ticket holders which were deemed charitable contributions.

    The new tax law ends this deduction partially under the logic that you are forced to do it in order to get season tickets.

    While you would not be forced to pay the donation to Sacramento, you would be getting something of equal value in a tax savings (same as if you buy a signed football at a charity outing with a value of $100 and you pay $100, you get no charitable deduction).

    In other words, people who don’t make the “donation” have to pay taxes while people who do pay the “donation” would not.

    The only way to get around this would be to force everybody pay the “donation” and then make California an income tax free state. Since there’s no income tax savings, there’s no value received. Like the seat license donation, under prior law the “donation” would be deductible.

    So, just like the mandatory seat license for 50-yard line football tickets, forcing somebody to make a donation eliminates it’s deductibility since it is no longer voluntary.

    There is a solution – Instead of the state calculating and forcing the donation, make the state income tax zero and let everyone decide how much they want to voluntarily pay. I bet revenue would drop to a small fraction as all those altruistic tree hugging Leftist show their true colors.

    Keep in mind that this includes local and property taxes too.

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