The Trump administration said Wednesday that it will propose new regulations for a provision in the Republican tax law that disproportionately raises taxes on residents in Democratic-led states, suggesting federal officials will move to block attempts to circumvent the tax overhaul.
In a notice, the Treasury Department and the Internal Revenue Service said they will issue regulations for the federal law's new $10,000 limit on the amount of state and local taxes taxpayers can deduct from their federal taxes.
Democratic lawmakers in several states have passed workarounds for the limit, in part by trying to reclassify state tax payments as charitable “donations” that can remain deductible under the federal tax code. But the announcement from the Treasury Department and the IRS notes that the federal government has the final say over what counts as charitable donations, indicating they may step in to block these plans.
“The proposed regulations will make clear that the Internal Revenue Code, not the label used by states, governs the federal income tax treatment of such transfers,” the federal agencies said in a statement.
New York and New Jersey have enacted measures designed to let state residents get around the new limit earlier this month, and legislators in California, Connecticut, Illinois, Maryland and Rhode Island are exploring similar proposals.
Earlier this year, New York approved a new “charitable fund,” giving taxpayers a sizable credit for their “donations” to the state, as well as a new voluntary payroll tax, which remains fully deductible, for employers to use. New Jersey is also giving residents the ability to donate to a local charity in exchange for a credit off their local property taxes. Because the donation will remain deductible under federal law, the measure will reduce residents' federal tax responsibility.
Former IRS officials have been skeptical of these schemes, saying payments should not be considered “charitable” if they replace mandatory taxes. Some academics who favor the workarounds have disputed that notion, pointing to existing tax credit programs in several states that allow donations to private schools to replace tax payments. But the IRS appears unconvinced.
“These notices are used by the IRS as a shot across the bow to government authorities to slow down,” said Steve Rosenthal, a tax policy expert at the Tax Policy Center, a nonpartisan think tank. “This shows the IRS has real reservations about the viability of this approach.”