Following is a statement from Carl Davis, director of research at the Institute on Taxation and Economic Policy, regarding proposed Treasury Department regulations released today. The proposed regulations take aim both at the states that have created new loopholes or “workarounds” to help their residents avoid the $10,000 cap on state and local tax deductions (SALT) that was established in the December 2017 tax law, as well as states with older tax credits for donations to private schools and other entities that were being used for the same purpose.
“States’ efforts to let their residents circumvent the SALT cap rightly deserved scrutiny, but it must be noted that the SALT workarounds weren’t without precedent. These proposed regulations would address not just the newest SALT cap workarounds, but also a slew of older private school tax credits that have been abused as profitable tax shelters.
“For years, several states have been helping their residents exploit the federal tax code with overly generous tax credits that allowed taxpayers, most of them wealthy, to receive lucrative returns on so-called charitable donations to private school voucher programs.
“The main difference between states that recently passed SALT workaround legislation and states that provide overly generous credits for donations to private schools are their political leanings. Private school supporters were hoping for a special carve out that would allow their tax shelter to remain intact, but the IRS was correct not to pick winners and losers. All types of charitable credits should be on the same footing under federal tax law, and it seems that this regulation would close down the charitable tax credit dodge across the board.”