Kirk Stark, a law professor at the University of California, Los Angeles, has suggested that states encourage residents to donate money to their state governments, then let the governments credit those donations against their state income taxes. Such donations would qualify as charitable donations, which are still fully deductible on federal taxes.
Mr. Stark noted that such programs already existed, albeit in a much more limited form. Several states let residents count donations to private schools as state tax payments under certain circumstances, an initiative that conservatives have promoted as a step toward school vouchers.
Another idea would be for states to partly or completely replace their income taxes with payroll taxes paid by employers, similar to existing taxes for Social Security and unemployment insurance.
In theory, such a move wouldn’t change after-tax income for either companies or individuals. It would just change where the tax checks were coming from. Companies would reduce workers’ pay by the amount of the payroll tax, and would be able to deduct the payments on their federal taxes. Because they would never receive the money, workers wouldn’t be taxed on it.
“In effect, it preserves the state income tax deduction,” said Dean Baker, a liberal economist who has been pushing for the plan.
January 1, 2018
Using state law to create loopholes to escape from the federal tax law.
"Democrats in High-Tax States Plot to Blunt Impact of New Tax Law" (NYT).
Subscribe to:
Post Comments (Atom)
Posts
73 comments:
Better idea: Lower California taxes.
Or another: Use state roads to escape the high tax state.
California may already be in a recession.
The financial situation is very fragile.
Propped up by media idolatry, California is moving from denial to delusion. Case in point: A recent AP story claimed that the state “flush with cash from an expanding economy” would consider spending an additional billion dollars on health care for the undocumented, as well as a raft of new subsidies for housing and the working poor.
All this wishful thinking and noble intentions ignores a slowing state economy, and a structural deficit, keyed largely to state worker pensions, that may now be headed towards a trillion dollars. Perhaps the widely celebrated, although poorly distributed “good times” of the past few years, have clouded Sacramento’s judgement.
State employee pension debt is approaching a trillion dollars. Those suggestions are ignoring reality.
In the long run, I don't think that it is going to work. They are trying to exalt form over substance, and the IRS tends to lose k down at that.
They could let residents deduct their federal income taxes on their state returns.
I thought all the California liberals were the people who want people to pay more taxes to support federal government functions.
The professor ignores the adverse impact of the alternative minimum tax on al itemized deductions. I live in a high tax state, Maryland. The new law raises the AMT threshold so that it does not impact most itemizers. That is an offsetting benefit.
Won't you please write a check for the corruptocrat fund? We promise your money will be well spent on the early retirement of some bureaucratic flunky. Thank you.
Better idea - let California secede from the union.
Doesn't sound like that would be legal.
What the professor ignores is that it is still the high earners' money and they will figure out every way to keep it. They are not going to voluntarily give to the state no matter what supposed benefit they may get. How long is it going to take the IRS to regulate that scam out of existence?
Good luck with that, blue states. The penalty for filing a frivolous tax return (or other "specified submission") is now $5000, and the IRS only has to add a trick to their list of frivolous tax arguments in order to trigger that provision. Alternatively, if tax courts decide that the argument "reflects a desire to delay or impede the administration of Federal tax laws", that can substitute for the position being listed as frivolous.
[fixed a typo in my earlier comment]
Donate to state government... haha!
You know I was just thinking, "Hey I don't pay California enough to live here." So why don't I voluntarily pay more and then try and deduct that off my Federal tax return?
Do they really think this is what goes through people's heads in high tax states? I call bullshit on this story.
Ok, so the plan is to increase the income tax burden on individuals with property, but not on non-owners?
That is completely nuts and operationally won't work. Certainly not for a long long time.
Imagine, say, Google, with tens of thousands of employees in multiple counties (property tax is county level). These employees buy and sell homes, move in/out of apartments, change counties, get married/divorced, get re-assessed, challenge and win/lose their assessment, etc, etc.
While all companies buy software to process taxes, you still have make sure the employee information is correct. And you have to report the information to the tax authorities.... Now in every county.
And it will take years to add this functionality to the software used by Google. Even longer to get the county tax software updated, assuming that is even possible - some of those guys run on decades old software on hardware (Tandem anyone?) that isn't made anymore.
Plus, and this is my favorite part, most people pay their property tax into an escrow account. My guess is that banks make money on that service, so I guess they won't anymore. Don't banks employ people in CA, NY, etc...?
Wasn't there a "Death Valley" post where someone pointed out that this is also an Operations term?
Good lord.
-XC
PS - However, this is a much better solution for the counties from a cash flow perspective.
PPS - Conflicting edits again
I believe the most local government should be the one most important to the individual, so for that I have mixed feelings about the new state deduction limitations. If I had my way, the state would have highish taxes and the feds very little. BUT in California? Where they are actually going forward with the train? I don't think high state taxes should be encouraged if that's what they are going to do with the money.
So says the guy paid by that same state government.
As many have already stated "Why not try lowering your taxes?"
And these are the people who supposedly think the rich should pay more, but not really.
I urge my high tax state, MD, to adopt the same pla, so I can refuse to donate.
California will go broke. What Trump should do then is place the state into receivership — assign people to oversee the actions of the governor, the state treasurer, and other officials, and forbid them to sign anything until the received the go ahead from their overseer. Might make a few other blue state governors think before they do.
"Do they really think this is what goes through people's heads?"
Yes - they are trying to scam the govt. why should that be a surprise? The scam would be to gift the state money, and then have the state reduce their taxes owed accordingly. It might work if there were no legal link between the contributions and the taxes owed. But, then, who trusts the govt that much? Certainly not the Blue State liberals who would be doing this. But any legally enforceable link between the two would likely turn it into tax evasion since the "gift" would be functionally a state income tax payment, which now has limited deductiblity.
Theoretically, shifting the state from collecting real estate, instead of income, taxes is on stronger legal foundations. The problem I see though for CA is that their property tax system has been screwed up for a long time, due to, I believe, Prop 13, which has greatly limited tax assessments, and thus taxes, for real property, until the properties sell, and the assessments can be updated to correspond to reality. Maybe a CA resident (or former resident) can maybe address this better.
“Tandem anyone?”
Ahhhhhh. A flash back. Tandems made me what I am today (whatever that might be.)
They were way ahead of their time. Most of the advances made in underlying networked hardware since the 1990s was recreating what Tandem did in the 80s, but with more standard protocols and operating systems. I’ve given up the IT game but that’s where it all started for me, in healthcare, then on Wall Street, then in telecommunications - all the Tandem sweetspots.
Happy new year all.
Oh, and California tax burden problems are what we do when we do things together, someone once sort of said.
"David Begley said...
Better idea: Lower California taxes.".
You know that's just crazy talk! It'll never happen until it's too late.
Didn't some red states try to enforce border law themselves when the Federal government wouldn't during President Obama's administration? I think they were overruled.
I see one problem with the state 'donations' scheme..... Feds don't recognize states as charitable institutions.
It goes to show you that democrats are full of shit when it comes to giving a shit about revenue.
The left do not want revenue, they want resistance. They don't want honesty and integrity, they want scams and loopholes.
I see another problem: according to Publication 526, "If you receive a benefit as a result of making a contribution to a qualified organization, you can deduct only the amount of your contribution that is more than the value of the benefit you receive." A tax credit is pretty definitely a benefit.
Most middle class earners don't hire sophisticated tax accountants to help them with these types of scams. The rich will always find ways to minimize their taxes, usually with the help of their congress critters who create loopholes.
When it comes to California, there doesn't seem to be much of a middle class. With the new tax laws, their will be a boom in the tax account business and in donations to congress critters by the tax evading rich.
I thought lowering taxes was bad. Bad as in heartless and cruel to the poor, sick, elderly, and downtrodden.
(I wonder if all the rage we see coming from the Dems is a product of a realization, whether fully underatood or only sensed, that their various major talking points are coming into incoherent opposition with each other. Trump out blue-collard them and they sense the danger of their factions being pitted against each other.)
If California wants to raise revenue, why don't they have the police unofficially collect a $1000 per illegal 'sanctuary fee' for the added expense of La Resistance that the illegals are forcing the government to undertake. What could possibly go wrong with such a scheme...but they would raise BILLIONS that way (and the police could self fund their pensions)
How does Turbo Tax or any reputable accountant put his name on such a scheme? Seems that quite a few accountants would be stuck in a cleft stick when facing such shenanigans.
Sounds like a sham which would easily fall. Can you explain that to the judge with a straight face?
Has this guy ever heard of a quid pro quo? The IRS states that if something of value is received in return for a contribution, only that portion of the contribution over and above the value received can be deducted. A $10000 "donation" that produces a $10000 "benefit" is fully taxable.
The payroll tax idea is more legally sound, but again that could backfire spectacularly on low-wage jobs where the employer would have to soak a large tax increase and couldn't lower wages to offset the cost.
I do find it amusing that Democrats are now rushing to find ways to help people lower their taxes. Might I suggest actually cutting the state taxes that are the source of the problem?
Blogger Paul Zrimsek said..."I see another problem: according to Publication 526, "If you receive a benefit as a result of making a contribution to a qualified organization, you can deduct only the amount of your contribution that is more than the value of the benefit you receive." A tax credit is pretty definitely a benefit."
Not to mention roads, bridges, police and fire, schools, trash collection ... This scam will never fly.
"Maybe a CA resident (or former resident) can maybe address this better."
Prop 13 happened because property taxes were going out of sight back in the 70s.
A friend of mine had a house assessed at $250,000, a lot for a house then. His property tax on that house was $7,000, about what a Ford station wagon sold for at the time.
Howard Jarvis was the brains behind it. His best quote was, "You can't ask the pigs to step away from the trough. You have to kick it away."
Prop 13 has been factored into the housing value. If it was repealed, and the Democrats keep trying to do so, housing prices would crash,. They may crash anyway as the prices have gotten crazy.,
In south Orange County, almost all single family detached houses are close to or above a million dollars.
Bruce Hayden beat me to the punch and did it better. There is no way this scam would ever be attempted to be implemented. Never fear, CJ Roberts whose Duck Theory of Taxation embodied in the original ObamaCare ruling took care of that of that harebrained idea. As for Prop 13. if the Left wants to turn California Republican let them attempt to repeal that. There was a reason it was put in the CA Constitution and that reason is just as true today as it was forty years ago.
@Cyrus - Folks in low wage jobs generally aren’t itemizing anyway.
I don't understand why these liberals are trying to defraud the federal government of tax revenue.
So exciting when the left embraces states' rights.
IRS gets to determine what a qualified charity is, not the state. Also, to meet the definition of charitable the contribution needs to be voluntary. Some taxpayer somewhere will choose just not to pay.
@holdfast - True, but if the blue-states move to a payroll tax system and shift the tax burden to employers similar to the employer half of FICA to lower the tax burden on the high-income earners, they will inflict collateral damage on the low-income earners, particularly those working at or close to minimum wage. The damage will be worse if the minimum wage is in a state where it's being pushed to $15 in the near future.
The cap of SALT deductibility is $10,000, which is higher than the majority claims each year even in blue states. It primarily affects homeowners ni elite coastal enclaves and the working rich. Because it affects primarily the well to do, blue states will maneuver to get around it and scam the federal government, sometimes in ingenious ways.
Strange how they always leave out the reduction in rates, which offsets the SALT cap. In our area, it was amusing to watch on our neighborhood listserv the desperate and futile efforts to prepay 2018 property taxes. They acknowledged they would pay less in taxes overall but it was an opportunity to virtue signal and proclaim their hatred of all things GOP. Entertaining as hell, like an episode of Portlandia.
Yea, how does the proposition that you can pay us or you can pay us make it a voluntary contribution?
Ah, so it's the protection money approach to taxation.
Is protection money tax deductible?
When I take charitable deductions, I can only include the amount in excess of any value received -- so if I buy tickets to a charity dinner, I get dinner in exchange, and I don't take the full amount of the ticket price as a deduction. Maybe I'm doing this wrong, but if I'm not it sounds like this plan gives the taxpayer a dollar for dollar benefit for each dollar of "charitable donation" to the state, so those would not be deductible. Any tax experts out there who can illuminate this?
Theoretically, shifting the state from collecting real estate, instead of income, taxes is on stronger legal foundations. The problem I see though for CA is that their property tax system has been screwed up for a long time, due to, I believe, Prop 13, which has greatly limited tax assessments, and thus taxes, for real property, until the properties sell, and the assessments can be updated to correspond to reality. Maybe a CA resident (or former resident) can maybe address this better.
Prop 13 limits the real estate tax increase until home is sold.
In SF bay area, you have old people on Social Security paying hundreds of dollars, or a couple of thousand, in property tax. Home they paid 30,ooo for now worth a million. Many would be forced out of their home if taxed on current market value. As old people die or move away, home sold at higher price and new guy pays higher tax.
Looking on real estate sites that show previous taxes paid is interesting in that you can see same size homes in same neighborhood paying much different taxes. Can go from less than a thousand to over ten.
These idiots don't know federal tax law, which is rich with examples of elevating substance over form to undermine tax evasion. Not a chance this would work imho.
"Many would be forced out of their home if taxed on current market value."
This is what brought about Prop 13.
What the Democrats hate is that it applies to commercial property which changes hands only rarely.
Molly: You are correct in the way you handle your charitable donations. There are some prior posts that cover this in detail.
Moving on, the only way you could claim the donation in full would be if you got absolutely nothing of value back from the state government. Wait .....
Didn't Massachusetts have have a line on their tax form that allowed people to pay extra taxes voluntarily? I think they collected a few thousand dollars. So much for all the liberals saying they want to pay more in taxes.
As for Prop 13, my parents were among those who were nearly priced out of their home as the value of the home was growing much more rapidly than my father's income.
No mention of tax on interest or dividend income, which the rich have much more of than the working class. I thought that was the point, to tax the rich more...
That's not going to work.
Henry said...
Is protection money tax deductible?
I don't know, but according to Nero Wolfe, ransom is.
The Final Deduction - Wikipedia
Wikipedia › wiki › The_Final_Deduction
https://en.m.wikipedia.org/wiki/The_Final_Deduction
Mrs. Althea Vail tells Wolfe she intends to pay the half-a-million-dollar ransom to the kidnappers, but she wants him to be certain she gets her husband Jimmy back alive and in one ...
the point, to tax the rich more
The point is to tax everyone less, reduce progressive distortions in the market, and promote economic revitalization. In short, let people keep the greater product of their labor, improve affordability and availability through an organic, democratic economic system (e.g. capitalism), while recognizing intrinsic value of human life through rehabilitation and non or marginally-contributory supplements.
The crediting by the state of the donation against state taxes due would count as income for federal tax purposes.
In other words, if I make a tax deductible donation to a "charity" that then uses the money to make a donation to the lender who holds my mortgage in my name- that latter credit to me is income by definition.
How can there be a charitable deduction when the state is not a charity? Every state is a taxing body. Everything you pay, even over and above that required, is still a tax.
No?
I will give you a concrete example in regards to state taxes:
When I lived in CT from 1995-2014, most of that time I received a state income tax credit from the state that was about $300 each year. The following year, I had to report that $300 dollars as income to the federal government- it was literally a line item on one of the federal forms. A donation to the state that serves as a credit against taxes due is no different and the reason should be obvious- if it were different, you have opened up a huge gaping loophole for tax fraud.
Rusty,
To be kosher, the state would have to make the taxes truly voluntary, just like giving to a charity is truly voluntary. In other words, the state can't both say that giving is voluntary, but here is the bill we will send you if you don't give it voluntarily.
"To be kosher, the state would have to make the taxes truly voluntary,"
I dare them to do that. I double-dog dare 'em.
Like the Emoluments Clause lawsuits, Professor Stark's legal theories are the sort of thing "bright" first-year law students imagine are possible before they've taken a single course in Constitutional Law or Administrative Procedure.
California may already be in a recession.
You better hope California is not in a recession, Michael K, because if it is the nation will follow shortly, and then a possible Democratic wave election will become a tsunamic certainty.
“In effect, it preserves the state income tax deduction,” said Dean Baker, a liberal economist who has been pushing for the plan.
Mr. Baker will likely be the IRS's star witness when it disallows this scheme (IRS doesn't like form-over-substance tax avoidance schemes). I just hope the poor sucker they pick for the first case isn't hit with fraud penalties along with taxes and interest.
The charitable contribution gimmick would never work for the reasons explained in prior comments. The only question is whether state officials would be arrested for tax fraud for trying it. The payroll tax concept is a bit more interesting, but I seriously doubt anyone in the IRS would buy the explanation unless they were intentionally tanking.
One of my favorite fantasies is California secession, where they really get to do what they want.
Step 1: Something like a re-registration of all voters so only U.S. citizens can vote. Citizens of Mexico, et. al., the so-called "undocumented," would have to sit it out. Then each county gets to hold a referendum to stay in the U.S., such as the inland and northern counties.
We have two years of border and trade negotiations giving California a defensible border and if San Diego doesn't stay in, a Guantanamo-style arrangement for the Pacific Fleet.
Step 2: California becomes an American Venezuela and the U.S. controls the water.
Step 3: Many blue areas in the U.S. get a fucking clue. Profit!
Go Sooners!
because if it is the nation will follow shortly, and then a possible Democratic wave election will become a tsunamic certainty.
Are you a DACA immigrant? You sure sound like a dreamer to me.
This is an incredibly stupid idea and can only be tyhe result of Trump Derangement Sysndrome.
The problem is not in the definition of a charitable deduction, it is that the credit against State taxes is Federal taxable income that exactly offsets the charitable deduction and leaves you right where you started.
Same as if someone forgives a loan to you, the amount of the forgiveness is taxable income in the yera of the forgiveness. And if someone makes youa loan with no expectation by either party that the loan will ever be repaid, it is income immediately. Or, why your deduction for purchase of a dinner ticket to a charity event is reduced by the value of the meal.
In this case you make a "contribution" expecting a $-for-$ tax break. That tax reduction is income.
I am always imprewssed how some people think that the people who draft federal laws and regulations are stupid, and if they made a mistake it will just sit thereuncorrected. I had te same reation when Trump threatened to withhold grants from "sanctuary" jurisdictions. As a forme grant administrator I knew that would never fly unless the law authorizing the grant made compliance with immigration laws an explicit requiremnt for eligibility--which hardly any do.
I saw a more feasible idea, to convert income taxes into payroll taxes, still deductible by the employer. That could be workable until the IRS stops it, but forget about progressivity and dealing with multi-earner households.
Post a Comment