The Senate’s plan, which is likely to evolve in the coming months, now centers around the charitable-donation alternative. Political observers say such a move by high-tax states could prompt Congress to change the rules for charitable donations. But they predict the end-run will encounter little resistance in Sacramento.
SACRAMENTO — California Democrats are toying with a brash scheme to skirt a new federal cap on state and local tax deductions: Instead of paying taxes to the Golden State, Californians would be allowed to donate the money to the state’s coffers — and deduct the entire sum from their federal taxes.
The hastily drafted proposal — to be unveiled as soon as Wednesday, when lawmakers return from a months-long recess — strikes back at one of the least popular elements of the GOP’s tax overhaul, one that that hit California and other high-tax, high-cost states the hardest. It also promises to establish a new front in California’s famous anti-Trump resistance efforts, which last year took on immigration enforcement and environmental regulatory rollbacks.
The sweeping changes to the federal tax code — which also doubled the standard deduction and dramatically lowered the tax rates for corporations — have created great consternation in California, where until this year, taxpayers could deduct an unlimited amount of state and local taxes from their federal tax bills.
But Congress did not rewrite the rules that permit taxpayers to deduct charitable donations from their federal tax bills, opening the door for a possible end-run by the high-tax states of California, New York and New Jersey. Red states such as South Carolina and Florida already offer generous tax credits to those who funnel money into state funds for private school vouchers, for instance, while blue states like California use tax credits to promote environmental conservation and college scholarship donations, said Kirk Stark, professor of tax law and policy at UCLA School of Law, who is advising Democrats in California on the proposal.
“I think for lawmakers in Sacramento, this is a twofer,” said Bill Whalen, a longtime GOP strategist now at Stanford’s Hoover Institution. “It directs more money to Sacramento, and secondly, it complicates Donald Trump’s life in that every dollar that somebody donates to Sacramento, that’s potentially one less dollar going to the federal government. This messes up the equation behind the tax cut.”
The average state and local tax deduction for Californians who itemize was $22,000, according to the state Department of Finance. The new federal law caps that deduction at $10,000, less than half of that amount.
People who donate to these state funds often receive a double-benefit: federal deductions on top of state tax credits, Stark said.