The IRS Bursts Cuomo’s Tax Illusion

About that California and New York charity work-around: Sorry.


The IRS Bursts Cuomo’s Tax Illusion

Democrats pan the GOP’s tax reform as a windfall for the wealthy, so linger on the irony: States run by progressives have spent months concocting plans to preserve a tax preference for the rich known as the state-and-local tax deduction. But now the Trump Administration appears to be putting the kibosh on the strategy sessions in the likes of California and New York.

On Wednesday the Treasury Department put out a notice that “informs taxpayers” that the Internal Revenue Service intends to promulgate regulations on the tax treatment of “certain payments made by taxpayers” that count as a “credit” against state and local taxes.

The reference is to schemes cooked up by innovative minds in places such as the California state legislature. Democrats are trying to set up a “California Excellence Fund” so that taxpayers can claim donations to the fund as a credit against state tax liability.

This is intended as a work-around for the $10,000 cap on the state-and-local tax deduction in the new tax reform. Before reform six states claimed more than half of the deduction’s benefit, which cost about $100 billion a year. New York and California alone raked in about a third of the cost due to their punishing rates on high earners (13.3% in California).

The fake philanthropy idea has always been legally dubious. Jared Walczak of the Tax Foundation noted in a paper earlier this year that case law and IRS regulations “generally require charitable intent for a contribution to be deductible,” which means the person doesn’t receive a substantial benefit. In the current work-arounds, the only point is to lower tax liability. The politicians in Sacramento and Albany are not charities. A victims’ fund would be more appropriate.

Treasury says the rules “will make clear that the requirements of the Internal Revenue Code, informed by substance-over-form principles, govern the federal income tax treatment of such transfers.”

The state-and-local deduction is sacred to Democrats because it conceals from voters the full cost of high taxes and spending. This explains rhetorical flights such as New York Governor Andrew Cuomo’s John Paul Jones reference that “we have not yet begun to fight” the GOP tax law. By Election Day this year he may be escalating to Churchill : We will fight on the Southhampton beaches, we will fight on the Hudson River estates . . .

Democrats may have other ideas to supplant federal tax law as they wait to repeal the rate cuts if they take back Congress. But meantime the IRS message is: Knock it off. The message is also a warning to taxpayers that they shouldn’t count on this or other gimmicks to reduce their tax burden. They should try voting for state and local politicians who won’t drive them out of the state.

Appeared in the May 24, 2018, print edition.

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