Bill Owens: Creativity To Combat The Tax Cuts And Jobs Act Of 2017

Jan 26, 2018

The recently passed tax legislation known as the Tax Cuts and Jobs Act of 2017 contains some significant negatives for New York taxpayers, and potentially for New York State.  Among the most notable are the limitations placed on the deductibility of state income taxes and real property taxes. This may be somewhat offset by the increase in the standard deduction to $12,000 for single filers and to $24,000 for a married couple filing jointly.  For many the increase in the standard deduction will eliminate the loss of the deductions for income taxes and real property taxes, but for others the answer is, it’s not even close.

How will states respond who have income taxes and real property taxes that exceed the increase in the standard deduction.  There has been much written about whether or not these changes were done for legitimate policy reasons, such as an attempt to drive down taxes in higher tax states or whether this is simply politically motivated – punish the blue states.

Creative juices are flowing in politicians, accountants and lawyers as the search begins to find ways to get around these provisions, or to at least reduce the negative impact.  We also have to take into account that it may take IRS several years to promulgate the regulations to provide guidance to taxpayers and their advisors about these statutory changes 

Governor Cuomo has also indicated that he will sue the federal government asserting that these new provisions in the tax law are unconstitutional, presumably because they have impact on a specific set of taxpayers, thus lacking a broad legislative intent.  This strikes me as somewhat fanciful.

Of the serious ideas being floated, two are most interesting to me.  Governor Cuomo is talking about essentially eliminating the income tax and utilizing a payroll tax to fund state government.  I haven’t seen a definitive proposal, but you can certainly imagine that this will create enormous stress for businesses, particularly if the impact is to shift the entire income tax collection mechanism to the payroll taxes.  This would obviously have the effect of exempting those who are not employees (subject to payroll taxes) from the tax base.  I doubt that this idea will go very far.

The one that fascinates me the most is the very creative idea of allowing individuals to make gifts (read that as a charitable contribution) to the state for income taxes and local municipalities and school districts for real property taxes.        

How would you structure a statute that allowed taxpayers to make a gift to a municipality or the state, and then to receive a credit against income taxes and/or real property taxes?  A general proposition of tax law, is that you cannot secure a direct benefit from your gift for which a deduction is allowable under the Internal Revenue Code.  Let me make that a bit clearer. If I have an income tax liability of $15,000 and a municipal/school district liability of $15,000 and state laws permits me to make a gift to those taxing authorities and further provides that my income tax and/or real property tax obligations will be reduced by the amount of the gift, thus clearly establishing a quid pro quo. I don’t think such payments would be deductible under current law.  If, however, the state statute was structured so that the government made the final decision as to whether to reduce or eliminate your income tax, and/or property tax, then that may be a way to accomplish this goal. Obviously, if the elected officials of state government or municipalities decided to accept the gifts and make a demand for income and/or real property taxes, their re-election probability would be reduced to zero. There is someone out there who can figure this out and get me that charitable deduction.  

There would be several notable impacts if such a plan were successful.  First, it would greatly increase the federal deficits since the anticipated revenue would not be allocated.  Second, it would literally generate an entirely new line of business for accounts and lawyers.  Third, it would throw the Internal Revenue Service into a significant quandary as it would literally have to pursue tens of thousands, if not millions of tax payers whose returns would need to be audited and challenged assuming IRS determined these deductions are not allowable.

I suspect the charitable contribution is one of many creative thoughts that will be generated by the new tax legislation.  Let’s hope for those in New York, these ideas work and saves us federal taxes. We will keep you posted as this process evolves. We can certainly thank Mr. Trump and Congress for providing what may sound like an oxymoron, but an exciting tax bill.  

Mr. Owens is a former member of Congress representing the New York 21st, a partner in Stafford Owens in Plattsburgh, NY and a Senior Advisor to Dentons to Washington, DC.

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