A California Senate leader on Thursday introduced legislation aimed at circumventing a central plank in the new Republican tax law, introducing a model that – if successful – could be replicated all over the country.
California Senate President Pro Tempore Kevin de León, D, introduced a bill that would allow taxpayers to make a charitable donation to the California Excellence Fund instead of paying certain state taxes. They could then deduct that contribution from their federal taxable income.
The bill is meant to completely upend part of the tax law congressional Republicans pushed into law last year. That law contains a provision that sets a new cap of $10,000 on the amount of state and local property and income taxes that can be deducted from federal taxable income. De Leon’s office said that one-third of all taxpayers, roughly 6 million people, itemized deductions on their tax returns and claimed an average of $18,438 for state and local taxes.
De Leon’s bill, if it became law, would essentially allow Americans to deduct much more than the $10,000 limit by redirecting state tax payments into a type of charitable contribution that eventually was later redirected to the state. The new federal tax law, which was only supported by Republicans, went into effect in January and does not include any caps on charitable deductions.
“The Republican tax plan gives corporations and hedge-fund managers a trillion-dollar tax cut and expects California taxpayers to foot the bill,” de León said in a statement. “We won’t allow California residents to be the casualty of this disastrous tax scheme.”
Several states have said they are looking for ways to challenge or work around the new tax law, particularly states like California and New York where residents pay a higher level of local taxes that they have traditionally been able to deduct without any limits. New York Gov. Andrew Cuomo, D, has said he is looking at a way of challenging the new tax law in court.
“We are working with the [Cuomo] administration on a legal response to Washington’s assault on New York taxpayers,” Amy Spitalnick, spokeswoman for New York Attorney General Eric Schneiderman, wrote in an email.
If the bill passes into law in California and is implemented, the implications for California and the rest of the country would be immense.
The new national tax law slashes income tax rates, but it also curbs or eliminates certain deductions in order to offset some of the lost revenue.
One of the most controversial provisions of the law is the new limit on state- and local-tax deductions. These limitations only apply to taxes paid by individuals and businesses that pass their income through to partners and proprietorships, among others. Corporations are exempt from the new limitation.
The cap on state- and local-tax deductions would raise close to $600 billion over 10 years, according to the Joint Committee on Taxation, and hit places like California, New York and New Jersey particularly hard.
If the limitation can be essentially cast aside by transforming state taxes into a type of charitable contribution in California, other states could use a similar model and expand the tax savings. This would end up adding more to the debt, though, because the government would be collecting less in tax revenue.
De Leon consulted with tax experts on the measure and it is attracting a lot of attention in part because smaller-scale versions of it have proven successful.
In 2011, the U.S. Supreme Court allowed taxpayers in Arizona to claim tax credits for making charitable contributions to organizations that make payments for children to attend parochial schools.
“As a technical matter, I think that it is an idea that has worked on a smaller scale in other circumstances like Arizona’s program to indirectly subsidize parochial school education,” said Edward Kleinbard, former chief of staff at the JCT who is now a law professor at the University of Southern California.
Spokespeople for the U.S. Treasury Department did not immediately respond to a request for comment.
The bill has only been introduced and still must be enacted through California’s legislature, which is controlled by Democrats, and signed by the Democratic governor before it would become law. De Leon is trying to challenge U.S. Sen. Dianne Feinstein, D-Calif., in a Democratic primary this year, saying he would serve as a more combative counterweight to President Donald Trump.
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