Ill-Considered Tax Credit Regulation May Put the Squeeze on Charities, Taxpayers
The White House Office of Information and Regulatory Affairs (OIRA) has started reviewing a draft of a final Internal Revenue Service regulation that seeks to prevent taxpayers from avoiding the cap on state and local tax deductions (colloquially known as the “SALT cap.”) Unfortunately, the version of the regulation the IRS proposed last August would also impose collateral damage on legitimate charities and taxpayers who are below the SALT cap. The administration can remedy those problems if it uses the OIRA review process to enforce some basic principles that have guided executive branch regulatory development for four decades.
In April 2018, the Treasury Department and the Office of Information and Regulatory Affairs closed a loophole that previously gave tax regulations an exemption from Executive Order 12866, which governs analysis and review of executive branch regulations. As a result, significant IRS regulations must now be accompanied by economic analysis of their consequences and must be submitted to OIRA for a 45-day review period. The executive order specifies that executive branch agencies shall identify and assess the significance of the problem the regulation intends to address, tailor regulations to impose the least burden on society, and use the best available evidence in their analysis.
We will not know the content of the final regulation until OIRA’s review is completed and the regulation is published. But the version proposed last August prohibits a taxpayer from claiming a federal charitable deduction if the taxpayer received a state or local tax credit exceeding 15 percent of the value of the donation.
The regulation addresses a significant tax avoidance scheme that high-tax states like New York, New Jersey, and California sought to create after the 2017 tax reform imposed a cap of $5,000 ($10,000 for a married couple) on deductibility of state and local taxes, known as the “SALT cap.” These states want to give tax credits to taxpayers who make “donations” to fund state and local government programs. By calling the expenditure a donation, the states seek to transform tax payments that are non-deductible for taxpayers who are over the SALT cap into deductible charitable contributions.