By Jeff Stein
February 12, 2018

California’s plan to shield residents from a tax hike under President Trump’s tax plan is likely to fail, said seven former high-ranking Internal Revenue Service and Treasury Department officials.

The proposal, passed by the state Senate last month, is seen as a test case for blue states trying to help their taxpayers avoid a giant increase under the GOP plan’s $10,000 cap on deductions of state and local property taxes.

The California measure would allow residents to make “charitable” contributions to a new state-run nonprofit group in exchange for a credit that would offset their state tax burden. Classifying the payments as charitable contributions rather than local taxes would help Californians avoid hitting the cap.

 

But it is unclear that the federal government will greenlight the plan, which also still has to win approval by the state’s Democratic governor and assembly.

Two former Treasury officials and five former IRS officials — including a former IRS commissioner, an attorney who served in the IRS chief counsel’s office, and a director of the IRS’s nonprofit division — have told The Washington Post that the agency could view the charitable contributions as an attempt to get around the Republican tax law, and issue guidance saying that it will view these payments as taxes subject to the cap. That could throw the issue to the courts.

Two former IRS trial attorneys working in the private sector in California gave similar judgments. (The California plan would give taxpayers a credit of 85 percent of the amount they contribute to the new state-run nonprofit organization.)

“I think the service will undoubtedly, almost inevitably look at this as a form of state and local taxes,” said Mark W. Everson, who served as commissioner of the IRS from 2003 to 2007 and now works at the tax consulting firm alliantgroup. “Suddenly, if you make a contribution, you’re relieved of your tax obligation? No. I’d be very surprised if this withstood IRS scrutiny.”

Lawmakers in New Jersey, Maryland and New York are weighing similar schemes to protect their taxpayers from bigger bills. The GOP tax law, which centered on a massive corporate tax cut and temporary reductions to personal income taxes, partially compensated for lost revenue by capping state tax deductions, a move projected to raise $90 billion in federal revenue by 2024.

Democrats have assailed the cap as designed to punish liberal voters, since blue states have higher local taxes than the national average. The average deduction claimed by a Californian who deducts state and local taxes is $18,438, according to the governor’s office.

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