California Senate leader Kevin de Leon unveiled legislation on Thursday that would help California get around the new cap on state and local (SALT) tax deductions, one of the more consequential measures for homeowners in President Trump’s tax bill.
Under the plan, Californians would make a “charitable donation” to the California Excellence Fund, which would give taxpayers dollar-for-dollar state tax credit. Taxpayers would use the credits to get out of paying SALT taxes, rendering the $10,000 cap on SALT deductions in the new tax law moot.
“The Republican tax plan gives corporations and hedge fund managers a trillion-dollar tax cut and expects California taxpayers to foot the bill,” de Leon said in a statement. “We won’t allow California residents to be the casualty of this disastrous tax scheme.”
Prior to the new tax law, taxpayers could deduct any state and local property or income taxes from their federal tax returns. The new law puts a $10,000 cap on such deductions. For most states and taxpayers, this doesn’t matter—some states don’t have income taxes, for example.
But in cities with expensive housing markets in high-tax states, the cap could lead to huge tax bills. The markets most affected by the change are coastal cities that tend to vote for Democrats, as lawmakers in those states have accused Republicans of weaponizing the tax code against Democrats.
According to The Mercury News, UCLA law professor Kirk Stark is advising lawmakers on the matter and notes that California already offers a similar deal in which donors to conservation easements or private school vouchers receive a state tax credit and a federal tax deduction for the contribution.
The Tax Foundation believes that California’s plan “will face serious headwinds,” saying “the requirement that charitable contributions have a charitable aspect is a significant challenge for this approach,” in addition to listing a number of court cases with rulings that could kill the plan.
“[The IRS] outlines what qualifies as a deductible charitable contribution, specifically excluding contributions from which one benefits, to the extent of that benefit,” the Tax Foundation’s post reads. “For instance, if one purchases a $250 ticket to a benefit dinner, and the fair market value of the dinner is $50, then $200 can be deducted—not $250.”
California isn’t the only state looking for ways around the new cap. New Jersey Governor-elect Phil Murphy said his state will explore all options to getting around the cap, including challenging the law on constitutional grounds. Pols from New York and Connecticut have expressed similar comments.
Want to see if the new SALT cap affects you? Find your market in the interactive table below and click on your county. If the upper left corner “Homes with property taxes higher than $10,000” is a high percentage, you might be subject to higher tax bills.