Will states replace taxes with ‘ donation’?

CHERRY HILL, N.J. — 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 state 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. Legislators 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 hightax 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.

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 more than $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 last 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.

“Our hard-earned tax dollars should not be subject to double taxation, especially not to line the pockets of the Trump family, hedge-fund managers and private-jet owners,” de Leon said in a statement.

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.

Three towns in his state — Paramus, Park Ridge and Fair Lawn — said Friday that they would pursue such a plan.

It is not clear that using charitable donations to fund government operations is feasible. The conservative Tax Foundation released a report suggesting that such a maneuver could violate IRS rules because the donation is being given purely for the financial benefit of the donor.

“To be deductible, charitable contributions must

have a genuinely charitable aspect, and cannot primarily benefit the contributor or involve a quid pro quo,” wrote Jared Walczak, a senior policy analyst at the Tax Foundation. “Payments which function as taxes may be classified as taxes even if states choose to call them something else.”

Kim Rueben, a senior fellow at the liberal-leaning Urban-Brookings Tax Policy Center, said there is some precedent for such a plan: 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.

Under the new federal tax law, employers’ state and local taxes would remain deductible. House Speaker Joe Aresimowicz and House Majority Leader Matthew Ritter sent a letter Wednesday asking a state commission to evaluate the idea. New York Gov. Andrew

Cuomo said he’s looking at a similar change there.

Rueben said that for the approach to work, states would have to figure out what to do with the income of high-earners who receive money from investments rather than jobs — something Cuomo said he could address through a tax on carried interest.

Nicole Keading, an economist at the Tax Foundation, said that change also could mean that states would replace progressive income tax structures with flat payroll taxes.

“You would be raising taxes on low-income people,” she said.

New York Assembly Minority Leader Brian Kolb, a Republican who is running for governor, said the state should focus instead on cutting taxes and spending.

“The issues really hurting New Yorkers are self-inflicted wounds,” he said.