State Efforts to Shield Taxpayers From SALT Cap Expose Deeper Flaws with Tax Incentives for Charitable Contributions

State efforts to shield their residents from the new federal tax law’s $10,000 maximum deduction for state and local taxes (SALT) reveal a deeper problem with our federal tax system, a new report from the Institute on Taxation and Economic Policy (ITEP) reveals. States such as New York, New Jersey, Connecticut, and Oregon are using new tax credits to help their residents convert their state and local tax payments into charitable donations. The ITEP report comes as the IRS and Treasury Department formally indicate that they intend to pursue new regulations related to the federal tax treatment of these donations.

“Long before the tax law passed, some states abused the idea of charitable giving to funnel public money to various activities, such as private K-12 education, by reimbursing up to 100 percent of their taxpayers’ donations with tax credits,” said Carl Davis, research director at the Institute on Taxation and Economic Policy. “The flimsy, hastily-written SALT deduction cap enacted last year made this type of gaming even easier than before, and it was entirely predictable that states would respond by enacting more tax credits of this type.”

The ITEP report cautions that the IRS, Treasury Department, and Congress should be careful to address this issue in a broad-based way, rather than picking and choosing some state tax credits for harsher treatment, while allowing others to persist as profitable tax shelters.

Read the entire report:
https://itep.sfo2.digitaloceanspaces.com/charitableworkaround_0518.pdf

 

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