Tax Notes, Martin A. Sullivan: Economic Analysis: Can Charitable Deductions to States Replace Lost SALT Deductions?

Tax Notes’ Martin A. Sullivan analyzes whether states may restructure their revenue sources to encourage deductible charitable contributions in lieu of non-deductible SALT payments. His article concludes as follows:

Many states already provide tax credits for charitable contributions to funds that serve a public purpose and can save the states money. For example, in 2014 Maryland gave a 25 percent income tax credit for donations to any “qualified permanent endowment fund at an eligible community foundation.” Those contributions were deductible against federal tax.

The website of the National Conference of State Legislatures lists 17 states that have programs providing scholarship tax credits to “school tuition organizations.” Those programs allow taxpayers to allocate a portion of their state tax liability to private nonprofit organizations that issue scholarships to K-12 students. Credit rates can be as high as 100 percent, but always have dollar limits. The tax credits provide an alternative to school voucher programs and can reduce state costs. The NCSL site reports that it has been estimated that the Florida Tax Credit Scholarship Program reduced state outlays by $ 1.49 for each lost $ 1 of revenue.

With tight budgets that must balance and with taxpayers upset about new limitations on deductibility of state and local taxes, it should be expected that state and local governments will aggressively expand their efforts to develop programs in which deductible charitable contributions to governments can substitute for deduction-limited state and local taxes. How the IRS will react, how Congress will react, and how state and local governments will design their programs remains to be seen. If governments want more certainty about the deductibility of contributions to their new programs, they could seek a ruling from the IRS, just as the government of Puerto Rico did (Doc 2014-1403) in 2010 to determine whether its new excise tax would be creditable against federal tax paid by U.S. multinational corporations.

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Posted by Lewis J. Saret, Co-General Editor, Wealth Strategies Journal.

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