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Attempts To Preserve SALT Deductions Could Be Unlawful: TF

Thursday, January 11, 2018

The Tax Foundation has suggested that strategies currently being explored by US states to preserve state and local tax (SALT) deductions for high-income residents face legal challenges.

The SALT deduction permits taxpayers who itemize deductions on their federal income tax to deduct certain taxes paid to state and local governments from their gross income for federal income tax purposes. Taxpayers may deduct their property taxes plus either their state income or sales taxes, but not both. Under the new Tax Cuts and Jobs Act passed in December 2017, deductions are now capped at USD10,000, while a significantly higher standard deduction is also likely to reduce the number of filers who itemize from 30 percent to about 10 percent.

"The deduction reduces the cost of state and local government expenditures, particularly in high-income areas, with lower-income states and regions subsidizing higher-income, higher-tax jurisdictions," explained The Tax Foundation in a January 5 analysis. "A USD10,000 cap, however, will limit the impact of those transfers, prompting some states to seek 'fixes' to restore the full deduction for their own high-income taxpayers."

In California, legislation has been filed to allow residents to make contributions in lieu of taxes, making a voluntary contribution to a new California Excellence Fund and then claiming the full amount as a credit against state income tax liability, since the state and local tax deduction is capped but the charitable deduction is not.

In New York, Governor Andrew Cuomo is considering creating a new employer-side payroll tax with a commensurate credit against state income tax liability, since employer-side payroll taxes are deductible.

"Both are intriguing ideas, but they raise serious legal and practical challenges," said Jared Walczak, Senior Policy Analyst, the Tax Foundation. "If states are genuinely concerned about the effects of their tax codes absent an uncapped state and local tax deduction, they should consider revisiting their tax rates rather than devising increasingly convoluted and legally suspect workarounds."