Will the CA State Government Become Tax Protestors?

[jcolvin2]

Group of law profs post paper about the possible implications of states significantly expanding their income tax credits for certain charitable contributions that would assist in the operations of government:

https://papers.ssrn.com/sol3/papers.cfm ... id=3098291

While hedged, the conclusion appears to be that an expanded use of state tax credits for taxpayer contributions in certain targeted areas (e.g. education) which sit in the heartland of the federal charitable contribution deduction, is supported under the law.

[operabuff]

It ignores the whole point of the exercise, which is to continue the present high state tax rates in a fiscal environment where the federal government no longer makes those high state tax rates painless. Because if they don't, then people might start demanding serious consideration of such heresies as lowering the overall tax bite and maybe making tough choices about who does and who doesn't get money from the state. And if they ignore that, then people might leave California and take their money with them, even with the risk of a concealed exit tax (via state tax audit) hanging over them.

California isn't a political monolith like the legislature is. This issue is going to highlight the socioeconomic fault lines.

And given how the legislature is reacting so far, I'm wondering if they'll end up trying something really stupid, like opening fire on Fort Sumter Vandenberg AFB.

This seems more like a political argument than a tax argument. In any event, as a resident of a high tax state, I can assure you that the FIT deduction by no means made the state tax rate "painless."

[Mider]

Here in GA we have numerous clients who use tax credits to reduce the tax paid to the state, but even these are subject to the limitations now going into place. We have started to hear of new mutations of credits to try to get around the limits but so far nothing concrete. The closest I have seen is the conservation easements being used as a charitable contribution, but the IRS has determined that these are listed transactions and have scared a few people away. We have heard that GA accounts for almost 30% of the people using conservation easements.

[Dr. Caligari]

If California amends its statute in the way discussed, I expect the Treasury to issue a Temporary Regulation (or at least the IRS to issue an "Announcement") saying that it won't work.

[notorial dissent]

I may be misreading this entirely, but I don't see any way it could/would work as proposed. CA is free to issue/create whatever tax credits it wants to as far as CA taxes are concerned, but as I understand it that is all they will ever be and only as far as CA taxes are concerned. This one just doesn't make any sense at all.

[Cobalt Shiva]

I may be misreading this entirely, but I don't see any way it could/would work as proposed. CA is free to issue/create whatever tax credits it wants to as far as CA taxes are concerned, but as I understand it that is all they will ever be and only as far as CA taxes are concerned. This one just doesn't make any sense at all.

The point is to get money into the state treasury in a way that allows high-income folks to deduct it from their taxes once it blows through the 10K cap.

I'm waiting for the Franchise Tax Board to suggest that California filers use the 861 argument for federal taxes, or they start asserting that the 16th Amendment was not ratified, the gold fringe on the flag means that the court is under admiralty law, etc.

[notorial dissent]

I quite understand the concept, it's just that the IRS really doesn't care about state tax credits since, at least as far as I am aware, they CAN ONLY apply to the state taxes.

The 861 argument makes about as much sense, and will work every bit as well. IMHO.

[Cobalt Shiva]

I quite understand the concept, it's just that the IRS really doesn't care about state tax credits since, at least as far as I am aware, they CAN ONLY apply to the state taxes.

The 861 argument makes about as much sense, and will work every bit as well. IMHO.

The idea is that you're not paying state taxes (capped at $10K) any more, you're now making a "charitable donation" that happens to exactly match the amount you would be paying in state taxes, and for which you will get a dollar-for-dollar state credit. Still paying the same money to the same people, but it's now magically a "donation."

As for the 861...my thinking is, if California's going to do this, they might as well go full TP.

[Mider]

At least here in GA, Film Tax Credits and Low Income Credits are used to pay your state taxes, but at the same time, the amount of the credit can be used as a state tax deduction on the Federal return. Since these credits are sold at a discount of from 8% to 15%, you recognize the spread as a short term capital gain. This is going to limit their usefulness. Does CA have anything along those lines?

[operabuff]

There’s something very unfair about allowing a taxpayer in a high-tax state to do an end run around the $10K cap by making a “charitable donation” to his State.

Would it be fairer if it were a taxpayer in a low-tax state? You and Cobalt Shiva seem to be using "high-tax state" as a term of opprobrium. The 10K limit applies to taxpayers in low-tax states as well. It would affect proportionately fewer taxpayers in a low-tax state perhaps, but the ones affected will be those in higher income brackets who might have the clout to get something like this passed in their states if it turned out to work.

[Mider]

Remember this is also county and local. So state payments, property taxes and in some states auto ad valorem taxes are part of the $10k. If they are going to try to find ways around the limit, there is going to have to be some collusion between all of the parties.

[Cpt Banjo]

Would it be fairer if it were a taxpayer in a low-tax state? You and Cobalt Shiva seem to be using "high-tax state" as a term of opprobrium.

No, it wouldn't be fairer, and my reference to "high-tax state" was simply a recognition of the fact that it's those states that are impacted the most by the new law and that are in the forefront of attempting to come up with end runs around the $10K cap. But who knows? Maybe the charitable-contribution gimmick will work, and Congress might have to go back to the drawing board.

What I really find galling is the wailing and moaning from those in power in the high-tax states (e.g. Governor Cuomo), who complain that capping the SALT deduction is somehow unconstitutional or results in double taxation, both of which I view as specious arguments. If Cuomo is really concerned about double taxation, let him start by urging the New York legislature to amend the New York State income tax regime to allow a deduction or credit for New York City income taxes.

[Mider]

Spent all day Friday watching Don Farmer discuss the new tax bill. He talked for a few minutes about SALT and ways that the states were going to try to get around the limitations. His take was that a charitable contribution could not be forced onto someone, so if the states were to say that their citizens had to pay, than that would violate the rules regarding contributions.