Our view: Don’t evade tax law; win Congress and change it
Certain rich people are doing everything they can to bend the new $1.5 trillion tax cut law to their advantage. But there is another group trying to game the system as well: state governments.
New York and New Jersey have enacted measures designed to get around the law’s $10,000 cap on deductions for state and local taxes. Several others may follow suit.
The workarounds are most often accomplished by allowing residents to pay into a “charitable fund” in lieu of state and local taxes. These funds pay for many of the same things that taxes do, but contributions to them of any size still would be deductible on federal returns.
There’s a bit of a tit-for-tat quality in all this. Republicans in Congress enacted a law that raised taxes for wealthy residents of high-tax states, generally with Democratic legislatures. These states then responded with their own laws using charitable funds to limit the impact of the federal law.
The Internal Revenue Service has threatened to disallow deductions on contributions to these funds. And the states have threatened to sue the IRS if it tries to do that.
The fight will likely go to court, but the bottom line is that these new charitable fund laws are obvious gimmicks designed to evade the new law.
Whatever political motivations Republicans might have had in going after blue states, they had a point: The federal government is essentially subsidizing wealthy individuals who want to live in expensive places such as New York and California.
Upper-income taxpayers are impacted the most because the new tax law also greatly increases the standard deduction (to $12,000 for an individual and $24,000 for couples). That means most taxpayers, even in high-tax states, will simply claim the standard deduction and not bother with itemized deductions.
Most big deductions in the federal code are designed to encourage certain behavior. The deduction for charitable giving, for instance, is unlimited as a dollar amount (though can’t be more than 50% of your adjusted gross income) because charity is deemed worthy. The deduction for mortgage interest payments, while highly controversial and perhaps ineffective, is at least aimed at boosting home ownership.
What is the principle behind deductions for state and local taxes? Encouraging high rates of taxation? That doesn’t make sense, nor do moves to blur the distinction between charity and tax payments.
While Democrats feel victimized by legislation that seemed intended at least in part to punish blue states, they have better options. The best of those is to win control of Congress and get rid of the tax cap the old-fashioned way: by changing the law.