The Power Not to Tax

By Stark, Kirk J. | American University Law Review, January 1, 2019 | Go to article overview

The Power Not to Tax


Stark, Kirk J., American University Law Review


INTRODUCTION

Of the many controversial features of the Trump administration's signature tax legislation, the Tax Cuts and Jobs Act of 2017 (TCJA),1 which took effect in 2018, perhaps the most contentious was the new limitation on the deductibility of state and local taxes. Under that provision, for tax years 2018 to 2025, individual taxpayers may deduct only $10,000 in state and local taxes paid.2 Under previous law, in place from the beginning of the modern income tax in 1913 through 2017, deductions for state and local taxes were largely unlimited and thus provided substantial federal assistance to the funding of state and local public goods. As a result of the new limitation, taxpayers now face a significant increase in the after-tax cost of funding education, health care, environmental protection-and a wide range of other essential services-particularly in "blue states" where voters have typically demanded service levels requiring higher tax burdens.3

Not surprisingly, lawmakers representing these states have not responded favorably to the new limits on the federal deductibility of state and local taxes (SALT). Shortly after TCJA's enactment New York Governor Andrew Cuomo asserted that the SALT cap "pillage[s]" states with higher tax burdens, fomenting an "economic civil war."4 Once the SALT cap took effect, New York and several other states began considering legislation aimed at restoring the ability of their residents to fund state and local public services on a tax-favored basis. States have considered a wide range of options, including shifting from nondeductible income taxes to deductible payroll taxes and imposing new entity-level taxes on pass-throughs, such as partnerships and LLCs. But the most controversial response has been for states to provide tax credits for charitable gifts to funds established by state and local governments to support public goods. In the months following TCJA's enactment, numerous states considered such legislation and by mid2018 Connecticut, New York, New Jersey, and Oregon had enacted legislation authorizing such charitable tax credits.5

The Trump administration's initial response to these efforts alternated between dismissive and derisive. The President's former chief economic advisor, Gary Cohn, was the first to express skepticism about state efforts to plan around the new SALT deduction limits, responding to questions from a reporter on a cable news show.6 Shortly thereafter Treasury Secretary Steve Mnuchin called the idea of treating gifts to local governments as deductible charitable contributions "ridiculous."7 Like Governor Cuomo's remarks about a pending economic civil war, the initial reaction from Trump Administration officials provided more heat than light. while commentary from the political class tended toward the deliberatively provocative, officials with expertise in the tax law issued more cautious statements, noting initially that they were following state-level developments.8 In late August 2018, the Internal Revenue Service (IRS) issued proposed regulations addressing this issue, and in June 2019, these regulations were finalized, accompanied by a notice indicating that additional regulatory guidance would be forthcoming.9 Meanwhile, the state of New York and the town of Scarsdale have initiated litigation in federal court challenging the validity of these regulations.10 On the legislative front, Democrats in the U.S. Senate forced a vote of the full chamber on a resolution that sought to overturn the new regulations pursuant to the Congressional Review Act.11 Although the resolution did not pass, its consideration highlights the ongoing political salience of state responses to the SALT cap.

The primary objective of this Article is to look beyond the blustery rhetoric regarding these so-called "SALT workaround" strategies and evaluate the structural features of the tax law at the heart of the ongoing controversy regarding their legal viability. …

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