WASHINGTON – A coalition of city, county and local government associations is asking the Internal Revenue Service to withdraw proposed rules designed to block attempts by states to use charitable deductions to workaround the tax law's new $10,000 cap on the federal deduction for state and local taxes.
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.
“We are concerned that the proposed regulations would hinder the ability of governmental entities to effectively, efficiently and economically serve their communities,” said the letter sent to the IRS Thursday by 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.
The New Jersey State League of Municipalities, which represents all 565 local governments in the state, also requested withdrawal of the proposed regulations, warning that they “encroach on local government's rights and authority under the principles of federalism to adjust the tax liability of their taxpayers.”
“Local governments utilize and maintain tax credits in order to fulfill a number of public purposes, including the construction of infrastructure, and the provision of critical municipal services,” wrote Frank Marshall, staff attorney for the New Jersey League. “The proposed regulations would undermine these objectives and impair the ability of localities to continue to provide a significant public benefit.”
The IRS already had received 7,251 comments on its website through Wednesday ahead of the midnight Thursday deadline for submissions.
County Executive Steven Bellone of Suffolk County, N.Y. is among those who have asked to speak at a Nov. 5 public hearing.
Bellone’s letter said he represents “one of our nation’s largest suburban counties” with 1.5 million residents and wants to talk about how the proposal will place “undue financial hardship” on residents and its “implications for current and future homeownership.”
The Association of School Business Officials said in its letter that capping the SALT deduction “reduces disposable income, limits ability and support for local taxes, and damages local, state and national economies.”
The school business officials said state and local governments fund about 90% of the cost of K through 12 education.
“It’s going to take a little bit of time for the IRS to consider all of those comments,” Emily Brock, director of the federal liaison center for the GFOA said Thursday. “At least that’s our hope, that they make careful consideration and listen carefully because there is significant impact at the local level for many jurisdictions across the country.”
Many of the letters received by the IRS oppose the regulation, Brock said.
Many other letters, however, commend the IRS for addressing the abuse of tax credits offered by a dozen states for private school tuition or vouchers that also can be claimed by wealthy donors on their federal tax returns, resulting in a windfall that’s larger that the donation.
“The profiteering facilitated by these tax credit vouchers is neither accidental nor incidental,” wrote Michael Dodge, superintendent of the Filmore Central School District in New York.
Dodge’s letter echoed similar letters from other school officials around the county who used the same wording.
“Tax accountants, private schools, and others in many states with tuition tax credit programs have long marketed these programs as tools for exploiting the federal charitable deduction,” Dodge and the other school officials wrote. “In contrast, states like Florida, which has the nation’s largest tuition tax credit program, specifically bar taxpayers from receiving state and federal tax cuts larger than their donations.”
The letters all request the IRS follow through by shutting down or scaling back this tax shelter.
Another significant portion of the letters were submitted by supporters of private schools who asked the IRS for a carve-out to protect the tax credit for donations to scholarship funds or for private school tuition.
The $10,000 cap will expire at the end of 2025, but most House Republicans want to make it permanent. House Democrats would consider repealing the SALT deduction cap 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 as a result of the November election.
