I.R.S. Warns States Not to Circumvent State and Local Tax Cap
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mobile.nytimes.com
The Treasury Department and the I.R.S. are worried that the workarounds could further balloon the cost of the tax cuts, which are projected to add more than $1 trillion to the national debt over a decade."
Describing this as likely to 'further balloon' the cost of tax cuts seems inaccurate and misleading - the cost remains precisely the same, it's an attempt by certain high-tax states to avoid a tax increase designed to partially offset the static cost.
https://www.cbo.gov/publication/53651
https://www.investors.com/politics/editorials/trump-tax-cuts...
"Laws enacted since June 2017—above all, the three mentioned above—are estimated to make deficits $2.7 trillion larger than previously projected between 2018 and 2027, an effect that results from reducing revenues by $1.7 trillion (or 4 percent) and increasing outlays by $1.0 trillion (or 2 percent). The reduction in projected revenues stems primarily from the lower individual income tax rates that the tax act has put in place for much of the period. Projected outlays are higher mostly because the other two pieces of legislation will increase discretionary spending. Those revenue reductions and spending increases would result in larger deficits and thus in higher interest costs than CBO previously projected."
Thanks for the completely unsourced editorial from a really trash biased source, but it definitely requires that you don't read a single word from the CBO report.
That's not economics. Tax policy never is, but this is especially bad work.
[1] CBO Appendix A, page 93: "Legislative changes... led CBO to increase its projection of the cumulative deficit over the 2018–2027 period by $2.7 trillion. Those changes were offset in part by the effects of revisions to CBO’s economic forecast, which led to $1.0 trillion in reductions to projected deficits, almost entirely because of increased projections of revenues."
That ended with this tax cut.
So now these states have a choice : either their constituents are actually made to pay for the budgets of these governments (much more so than before, at least), or they limit their spending to the value of the SALT deduction.
What spin you want to put on this, feel free to do it, but let me give you some ideas.
"Federal government no longer to pay for California/Illinois/... pensions !"
"States now responsible for the money they spend"
Or, how about:
"Federal government imposes massive budget cuts on democratic governments !"
"Costs of Trump tax cut unilaterally imposed on state governments !"
They're all true, sort of.
If they consider their taxes a charitable contribution I should be able to decide to not pay it.
I know a lot of charities I’d rather give money to then the government.
> The I.R.S. warning comes in response to states, like New York, that have looked for ways to blunt the impact of a new $10,000 cap on the state and local tax deduction, known as SALT. The cap, which was included in last year’s $1.5 trillion Republican tax overhaul, hit predominantly Democratic, high-tax states hardest since it limits the amount of state and local sales, income and property taxes that residents can deduct from their federal taxes.
It’s subsidizing sparsely populated states that either don’t need to or don’t care to provide the state/local services that populated places need.
But you need to clear $24k in deductions (as a married couple) to even take that deduction.
The average homeowner loses, as they can’t cross the threshold, and every marginal state/local tax dollar costs 15-25% more than it did before.
I don't think the "average homeowner" would complain that they can't take as big of a homeowners deduction when the net result is they are exempting a larger portion of their income regardless.
You still owe regular property taxes, with all the standard penalties for non-payments. What these laws do is give "municipal and county governments and school districts the legal authority to create special charitable accounts" and then let "local governments offer residents who contribute to the new accounts a nearly dollar-for-dollar property-tax credit, effectively turning their property tax bill, at least on paper, into a charitable contribution" [1].
Your contribution to the charitable account is voluntary. Your property-tax obligation is not.
[1] http://www.njspotlight.com/stories/18/05/06/new-law-lets-loc...
We're a nation of laws. Not taking kindly to a case isn't justification for a ruling. The tax law was haphazardly drafted and written specifically to increase wealth transfers from surplus states (e.g. Delaware, Minnesota and New Jersey) to deficit states (e.g. New Mexico, Mississippi and West Virginia) [1]. I see valid arguments for both sides.
[1] https://www.economist.com/graphic-detail/2011/08/01/the-red-...
The tax plan certainly had flaws, but capping SALT was egalitarian IMO.
When Mississippi cuts benefits for its residents, my federal tax dollars pay for their disability insurance. When West Virginia fails to regulate its industry, educate its residents or build infrastructure, my tax dollars subsidise their choices. TL; DR It is odd to talk about subsidy when they generally flow from those hit by the SALT cap to those benefiting from this bill.
I also don't see why it's a problem that some states are donors, they have more to give. Federal spending should be progressive, otherwise it simply drives more inequality.
Even a flat tax wouldn't change that.
If you have long term capital gains on a stock, you can donate that stock and not pay tax on the long term capital gains. Additionally, the full value of the stock counts against your income for determining tax.
This type of nonsense is all over our tax code.
https://www.irs.gov/charities-non-profits/substantiating-cha...
States are already allowed to let one deduct charitable contributions from state taxes however they like. And visiting a park one donates to isn't considered quid pro quo. These cases will be complicated and interesting.
[1] https://www.irs.gov/charities-non-profits/substantiating-cha...
EDIT: Stated specifically, for NY: "The Budget establishes a charitable gift trust fund in the joint custody of the New York State Commissioner of Taxation and Finance and the State Comptroller."
[0] https://www.budget.ny.gov/pubs/archive/fy19/enac/enacted-tax...
Hence my argument for the lack of a quid pro quo. The charity gets the quid; someone else provides the pro quo. How states and municipalities count their tax obligations could be argued to be local issues, from a Tenth Amendment perspective. (We just had a landmark anti-commandeering case get decided on by SCOTUS.)
Here's a clearer quid pro quo: churches.
Charities and municipal governments are legal fictions of the states. I do not know the specifics of how these charities are set up. I presume they are ownerless non-profits. (If not, the New Jersey legislature could simply create such an entity type.) Determining common control with municipalities will be tricky.
That they are creatures of the states, and not the federal government, is what will make the lawsuits interesting. The most realistic pathway for the IRS would be to argue these charities do not qualify as such under federal tax law. How they will do this, within the confines of the 10th Amendment and a haphazardly-written tax code, without hitting other charities, will be delicate and complicated.
In the case of school districts, easily the largest line item of the SALT liability for New Yorkers, The quo would be educational services. Anyone who donates to one of these "charities" and then puts a child in the school system could be at serious risk for tax evasion. It doesn't matter legally if the "charity" is also floated by other revenue streams. It's about what the filer claims and what he receives. I am pretty sure the IRS has a history of formulas to apply for figuring out how much is rendered in services[0]. Per pupil expenditure would be a likely candidate. Perhaps those with no children in the system would be safe.
The analogy with the church would be if they were giving your child a free or discounted on religious school admission as a contingency of how much money you donate. You can't write off donations like that[1]
[0] https://www.irs.gov/pub/irs-pdf/f8283.pdf
[1] https://www.irs.gov/publications/p526#en_US_2017_publink1000... - "Contributions From Which You Benefit": .... "Tuition, or amounts you pay instead of tuition. You can't deduct as a charitable contribution amounts you pay as tuition even if you pay them for children to attend parochial schools or qualifying nonprofit daycare centers. You also can't deduct any fixed amount you must pay in addition to, or instead of, tuition to enroll in a private school, even if it is designated as a "donation."
This is a news article about a notice they've just issued indicating as much.
The law is not a computer program. Being clever about definitions does not often have pleasant results. This approach is unlikely to work.
The IRS is powerful. But so are the states. If you think this is a simple case, you're mis-understanding it. Fully expect this to go to the Supreme Court.
Charles Barkley:
"Bill Russell called me one time… He says, “Charles Barkley.” I said, “Yes, sir, Mr. Russell.” “You grew up in Alabama. Right?” I said, “Yes, sir.” He says, “Did you go to public school?” I said, “Yes, sir.” He says, “Did the cops ever come to your neighborhood?” I said, “Yes sir.” He said, “Any of the houses ever on fire and the firemen come?” I said, “Yes, sir.” He said, “I don’t want to see your black ass on TV complaining about your taxes anymore.” I says, “What do you mean?” He says, “So now that you got money you don’t want to help other people out, but when you were poor, other people took care of you.” And I says, “You know what, Mr. Russell, you will never hear me complain about my taxes again.”
And it was a very interesting lesson for me, because I do think rich people should pay more taxes. I’m blessed to be one of them, and we should pay more in taxes. I learned my lesson. I never complain about taxes.
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"I like to pay taxes. With them, I buy civilization" -- Oliver Wendell Holmes
Residents of CA, NY, NJ, etc. easily hit these limits, so some of these states are giving residents other ways to effectively pay their state/local taxes while maintaining full deductibility for federal tax purposes.
Now the IRS is trying to fight back against these rules. But the IRS will have a difficult time drawing distinctions between the existing allowed deductions and the novel deductions they are trying to exclude.
As a (former) tax lawyer, I agree that this is an uphill battle for the IRS. If the states do a good job of creating alternatives to state income taxes, the IRS will have a very tough time defeating them in court.
It's interesting to see the Republican administration attempting to close these "loopholes" and heavily-Democrat states arguing in favor of said "loopholes". Quite a role-reversal!
Edit: clarified language in last paragraph
When I said “enforce” loopholes I meant they are trying to defeat them.
88% of the SALT deductions were going to households earning over $100,000. 1% were going to households earning $50,000 or less. The tilt is obvious: this was a tax benefit for better off persons, a way for higher income earners to avoid paying the full high tax rates in states like New York and California.
This is an extremely ugly hypocrisy as it pertains to what their platform is supposedly all about. I've yet to see very many prominent people on the left, either politicians or media, call it out. It also defangs the left's ability to pursue Republicans for their favoritism toward high income brackets regarding taxes: they're plainly arguing & working to preserve a tax cut for higher income earners.
Fighting what largess the USG wants to afford in deductions is silly. They could say there is 0 deduction for State taxes and be within their rights. NY is sulking because their government has gotten so out of hand that they have to strangle their citizens to avoid total default.
I get what your'e saying but the details if what you describe is the a whole healthcare industry issue. Too often I see "OMG THIS IS THEIR FAULT" no it's just how the insurance industry is and nobody has a backbone enough to deal with that tangled mess. This networks and providers have been an issues since before any federal requirement(s).
On the one hand, it seems an absurd and grossly inaccurate characterization, borderline lying and definitely tax evasion.
On the other hand, there's this:
"The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people."
Also, someone needs to tell the IRS that they don't get to dictate Federal law. The legislative branch decides the laws, the judicial branch interprets them. The IRS is neither.