State, local groups bring fight against SALT cap to IRS hearing

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WASHINGTON — State and local government officials are looking to limit the damage they say will stem from the $10,000 cap on the federal deduction for state and local taxes that took effect this year.

The groups will square off against supporters of a proposed Internal Revenue Service enforcement regulation related to the cap at a public hearing Monday.

This federal ceiling on state and local tax deductions, commonly referred to as SALT, is opposed by most state and local government groups. They argue that the ceiling will make it more difficult for them to raise taxes to pay for public services and infrastructure.

Among the 25 scheduled speakers is County Executive Steven Bellone of Suffolk County, N.Y., whose written request to speak said he will discuss how the proposal will place “undue financial hardship” on residents and its “implications for current and future homeownership.”

Bellone’s letter noted he represents “one of our nation’s largest suburban counties” with 1.5 million residents.

The proposed regulation is designed to prohibit workarounds that state local governments in several high-tax areas, including New York and New Jersey, have approved since enactment of the cap last December as part of changes to federal tax laws.

Several of the scheduled speakers plan to ask for carve-outs to protect state tax credits for private schools or land conservation.

Eleanor Brown, a tax attorney who chairs the board of the Virginia Outdoors Foundation, said she will point out that federal policy on land protection encourages conservation easements. Brown will ask that the regulation not apply to the transfer of development rights and that effective date be delayed until the end of the year so her organization can close 75 projects that are underway.

P. George Tryfiates, director of government affairs for the Association of Christian Schools International, will ask the IRS to exclude from the regulation charitable donations for private school scholarships.

“Not one low-income child should lose her scholarship simply because an overbroad regulation ends up creating disincentives to giving,” Tryfiates said in an email.

The enforcement regulation, however, is supported by groups that see it as a fix for abusive tax shelter practices involving state tax credits that existed prior to the SALT cap.

Eighteen states have tax credits of up to 100% for private school donations, often to scholarship funds, which often are used by donors to also claim federal charity deductions.

Only six states, most notably Florida, prohibit donors from simultaneously claiming a state tax credit and a federal charity deduction, according to Sasha Pudelski, advocacy director of the School Superintendents Association.

Pudelski’s group, which has 13,000 public school members around the nation, is supportive of the regulation. “If this is what we get at the end of the day, we’d be totally satisfied,” she said.

The proposed IRS regulation would only allow federal charity deductions for the amount of a donation not covered by a state tax credit.

The School Superintendents Association did not support the $10,000 cap on SALT and views any carve-out for private school vouchers as “a double whammy” for public education.

Carl Davis, research director of the Institute on Taxation and Economic Policy in Washington, D.C., is among the supporters of the regulation who also will speak.

“It looks like most people speaking will be asking for special carve-out where they don’t want their credits to be subject to this regulation,” Davis said in an interview.

Davis opposes carve-outs because state tax credits have been used for years by high-income households to avoid the Alternative Minimum Tax which clawed back on the SALT deduction but never limited the charitable deduction.

"It's clear that taxpayers know that these credits, not just the new ones in New York and New Jersey, but the ones that have been around for years in Alabama and Louisiana and Pennsylvania, can be used as SALT deduction workarounds,” he said.

A coalition that includes the U.S. Conference of Mayors, the National League of Cities, the National Association of Counties, the Government Finance Officers Association and the International City/County Management Association sent the IRS a letter last month saying that that “the proposed regulations would hinder the ability of governmental entities to effectively, efficiently and economically serve their communities.”

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SALT deduction Government finance Tax loopholes IRS NGA USCM NLC GFOA Washington DC
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