The Treasury Department released its final rules Tuesday outlawing the push by Democrat-led states to undermine the GOP’s new tax law, saying that donating to state-run charities isn’t a substitute for paying federal taxes.
A number of high-tax states had balked after the tax changes President Trump signed in 2017 limited how much state and local taxes could be written off on federal returns.
New York, California and New Jersey all explored new laws allowing residents to make some of their state tax payments as contributions to charities, figuring that would be an end-run around the federal changes, since charitable contributions are still fully deductible.
But the feds said that violated the spirit of the law and they are shutting it down.
They said a longstanding principle of tax law is that someone who gets something of value in exchange for a donation to charity can only deduct the net value of the donation.
The new rule “applies that principle, known as the quid pro quo principle, to state tax benefits provided to a donor in return for contributions,” Treasury said.
That means if someone donated $1,000 to a state charity and the state gives a $700 tax credit for the donation, the taxpayer can only take a federal write-off on the remaining $300, since the taxpayer already got $700 of value.
Rep. Bill Pascrell, a New Jersey Democrat and one of the most vocal critics of the GOP’s tax overhaul, blasted the IRS rules.
“This Trump administration seems to wake up in the morning trying to think up ways to screw my state,” he said, saying the move undermines New Jersey’s workaround.
“This isn’t over,” he vowed.
The IRS had proposed the rules earlier, and Tuesday’s announcement was a finalization of the rule.
Limiting state and local tax (SALT) deductions to $10,000 for a married couple filing jointly was a major part of the GOP’s tax overhaul. While income tax rates were lowered, the new law imposed caps or did away with a number of deductions.
The SALT limits struck particularly hard at wealthier people with expensive homes, who pay high property taxes.
Republicans said high-tax states had been benefitting unfairly, since residents wrote off a larger share of their tax burden. That meant those states were powering their spending at the expense of federal taxpayers.
GOP lawmakers said the answer was for those states to cut their taxes.
The states, though, had other ideas.
Several of them sued, arguing the rules were discriminatory. Some sought the workarounds.
Meanwhile, Mr. Pascrell and other Democrats from those high-tax states rushed to introduce legislation repealing the SALT limits, in a move that would have amounted to a new tax cut for wealthier Americans.
That legislation has not gained traction on Capitol Hill.
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