Why the SALT deduction cap divides the nation
WASHINGTON – A deeply divided public has submitted more than 5,600 comments through Tuesday on the Internal Revenue Service's proposal to prevent taxpayers from avoiding the $10,000 federal cap on state and local tax deductions that Congress enacted last December.
Thursday is the deadline for sending comments to the IRS on its proposed rule covering the availability of charitable contribution deductions when a taxpayer receives or expects to receive a corresponding state or local tax credit.
Congress, or more specifically Republicans, voted for the cap in December as a revenue raiser to partly offset part the deficit-producing cost of tax cuts. But this first-ever ceiling on state and local tax (SALT) deductions, has raised the hackles of taxpayers across the political and policy spectrum.
State and local governments in several high-tax areas, including New York and New Jersey, have enacted workarounds for the cap on SALT deductions that allow taxpayers to make charitable donations in lieu of paying property taxes or local income taxes.
The proposed IRS rule is aimed at curtailing those workarounds, but would also cap pre-existing tax credits enacted by 33 states.
State and local government groups, which oppose the cap, are planning on submitting a coalition comment to the IRS letter prior to Thursday’s deadline.
Supporters of a child care tax credit in Colorado are asking for a narrowly defined exception for charitable groups while school choice advocates want an exception for school scholarship organizations. A similar request is being made by conservation groups for donations of private land which they point out the federal government encourages private landowners to do.
The National PTA, which is not taking a position on the rule, said in a letter from its Executive Director Nathan Monell, “We do feel strongly if the IRS chooses to finalize these regulations, it should not carve out a special loophole for private school donors.”
The conservative-leaning Tax Foundation and the liberal-leaning Institute for Taxation and Economic Policy have said the IRS proposal takes a non-partisan approach to tackling what they perceive as abuses of the tax code.
Opponents of state tax credits for private schools also have applauded the proposed rule in many of the comments received by the IRS.
“I am writing to thank the IRS for proposing the ending of a tax shelter that allows taxpayers to turn a profit when they fund private schools through state tuition tax credit programs,” wrote Mike Andrewjeski of San Francisco. “This comes at the expense of state and federal budgets. Meanwhile, people line their pockets while the rest of us pay our fair share of taxes.”
The Arc of the United States, an advocacy group for people with intellectual and developmental disabilities, wrote that it has “serious concerns about private school voucher programs” because “students who are placed by their parents in private schools in almost any state” don’t have federal legal protections under two key laws.
Neither the Individuals with Disabilities Education Act nor the accountability under the Every Student Succeeds Act apply to private schools in most states.
“It is entirely unacceptable that tax credit programs in a dozen states are used to pay schools that are allowed to exclude students with disabilities while also allowing individual or corporate donors to obtain a tax benefit,” wrote Annie Acosta, director of fiscal and family support at Arc’s headquarters in Washington.
Many supporters of tax deductions for private school scholarship donations, on the other hand, are asking for a carve-out as are groups that support state tax credits for donations of private land for conservation easements.
“I am writing as a member of the Christian school community, wrote Leslie Nodal of Naples, Florida. “My school participates in the [Florida] tax credit scholarship program. There are some low-income children that attend my school because it is the best option for them. The proposed regulations apply far beyond the kinds of programs the IRS should be targeting to resolve state efforts to avoid the cap of the SALT deduction.”
The Baptist Joint Committee for Religious Liberty said it supports federal policy that "allow the reduction of tax liability for based on charitable giving," but recognizes there has been "profiteering" through the exploitation of the federal charitable tax deduction.
"Since these states have not acted to shut down the shelter on their own, it is appropriate for the IRS to scale back or dent the federal tax deduction to the extent that the donation is reimbursed with a state tax credit," wrote K. Hollyn Hollman, general counsel, and Jennifer Hawks, associate general counsel, of the Baptist Joint Committee.
Conservation Partners in Virginia said it has helped hundreds of landowners who have protected more than 100,000 acres of farms, forests, and other open space land. Virginia’s transferable land preservation tax credit “rewards only voluntary contributions of land and conservation easements,” the group said.
“In Virginia, easement donations must meet the federal requirements in order to qualify for the state credits,” the group added.
The cap is supposed to expire at the end of 2025, but most House Republicans want to make it permanent. House Democrats would consider trying to repeal the cap on the SALT deduction next year if they regain majority control of the chamber in the November election.
Either change – making the cap permanent or repealing it – would require approval by a closely divided Senate that’s unlikely to be dominated by either party after the November election.