California’s Democrat-controlled state government wants to re-classify state taxes as charitable contributions to avoid the new $10,000 cap on state and local tax (SALT) deductions in President Donald Trump’s new tax reform.
For decades, California Democrats have demanded higher and more progressive tax rates as a social justice cure to address income inequality. But they are appalled that President Trump’s Tax Cuts and Jobs Act progressively hurts the state’s highest income earners by capping SALT deductibility.
Gov. Jerry Brown called limiting SALT deductibility to about an upper middle-class income level as “evil in the extreme,” and hissed at Trump’s Republican allies for “acting like a bunch of Mafia thugs.” California Senate President Pro Tem Kevin de León (D-Los Angeles) snarled, “Republicans in Washington have once again zeroed in on California to punish us and make our state the single biggest loser in their reckless tax scheme.”
California is the most populous state, but only has the fourth-highest percentage of residents that claim SALT deduction, at 34.5 percent. The Golden State’s “per-filer” average SALT deduction is a middle-class $12,682. But due to rich coastal and multi-property owners, California has the highest “per claimant” SALT deduction of any state, at $36,802. For California’s rich, tax reform means an effective increase in state taxes.
De León is promising to introduce legislation next week that would allow California’s highest income earners to continue deducting 100 percent of state and local taxes over the $10,000 limit by renaming them charitable contributions.
Final negotiations between the U.S. Senate and House versions of tax reform maintained deductions for actual charitable contributions to support popular programs to support poverty relief, non-profit schools, and the arts.
But IRS Publication 526, which defines what qualifies for federal charitable contribution deductions, specifically allows deductions for “federal, state, and local governments, if your contribution is solely for public purposes (for example, a gift to reduce the public debt or maintain a public park).
It is not clear that California’s gambit would pass the test — but Democrats may try.