- New Federal Tax Law Spurring State Action in the Form of Legislative Mitigation, Plaintiff Coalitions
- March 7, 2018 | Authors: David M. Kall; David D. Ebersole; Honor D. Banvard
- Law Firms: McDonald Hopkins LLC - Cleveland Office; McDonald Hopkins LLC - Columbus Office
In early January, Governing revealed that 25 states are facing budget shortfalls going into 2018, but “[t]hat’s better than the 31 shortfalls [that the government relations firm MultiState] found last January.” The states with high concentrations of oil and natural resource states, mostly in the Midwest and the Northeast, are hardest hit.
The piece noted that for some, like Rhode Island and Vermont, lawmakers should be able to resolve the discrepancies relatively easily. But others, like New York, “may have to consider significant changes to solve their fiscal problems.” New York faces a large deficit, as we described in our piece this week covering Gov. Cuomo’s budget speech.
The federal Tax Cuts and Jobs Act may not be helpful for states like New York. The $10,000 cap it imposes on the deductions that taxpayers can claim, on their federal returns, for their state and local tax payments (SALT) will harm certain people and many jurisdictions are in the process of considering how mitigate its effects.
CHARITABLE DEDUCTION LEGISLATION
One of these work-arounds involves leveraging charitable deduction rules. For example, a measure in California, SB-227, would allow a personal income and corporation tax credit equal to the amount of a contribution to the California Excellence Fund. SB-227 creates the California Excellence Fund in the General Fund, for the purpose of accepting monetary contributions exclusively for public purposes. The Tax Foundation, for one, thinks this is a “dubious” idea that “faces serious legal headwinds.”
The Institution on Taxation and Economic Policy (ITEP), not often in the same camp as the Tax Foundation, agrees. In a piece titled, IRS Can and Should Block “Charitable Contribution” Schemes, the policy group pointed out that a “contribution” that the government later reimburses “cannot be called ‘charitable’… This is and has always been the fundamental idea behind the federal deduction for charitable giving, which is that money given by a taxpayer to charity does not benefit the taxpayer but society generally.”
ITEP suggested that the IRS “should follow a commonsense interpretation of the law, which is that if you are reimbursed for a contribution you make — of any type — then it is not charitable and does not justify a deduction on your federal tax return.” This would foil California’s legislation mentioned above, SB-227, but, ITEP opines, laws like SB-227 would not “do a thing to help balance state budgets” anyway. Instead, such statutes would simply give rich people more tax breaks, “the last thing the nation needs.”
Last Friday, Gov. Cuomo, another very loud opponent of the Tax Cuts and Jobs Act, announced that his state, along with New Jersey and Connecticut, have launched a coalition that will sue the federal government over the Act. Their working theory is that the law interferes with states’ abilities to govern by making it harder for them to provide for their own citizens. They also say that the law targets New York and similarly situated states unfairly and unconstitutionally in violation of the Equal Protection Clause.
The announcement highlights the fact that the Act, which would cost New York $14.3 billion, has a disproportionate effect on the Empire State, “which already sends $48 billion more each year to Washington than it receives in federal dollars.”
As with the charitable deduction arrangement, the Tax Foundation frowned on this strategy as “ill-advised.” This is so because “just about every major revenue or expenditure policy has disparate geographic effects.” For instance, there have been no equal protection lawsuits against the fifty-year old alternative minimum tax, which also hits residents in the three coalition states “particularly hard.”
Additionally, the trio of would-be plaintiffs has not quite nailed down its precise claims yet. Citing a Buffalo News piece, the Tax Foundation noted Gov. Cuomo’s counsel’s statement that the “precise legal claims are still being explored.” Sneered the group, “[t]hat’s right: they’ve announced their intent to sue but they don’t yet know why. They feel confident that the SALT cap is illegal, but they don’t yet have a theory as to how.”The Tax Foundation’s true beef seems to be with the states’ hypocrisy, evidenced by “allowing wealthy residents to double up on tax benefits unavailable to others.”