A spokesman for New York Gov. Andrew Cuomo defended the state's move to "restore balance for New York taxpayers who Washington politicians targeted as a piggy bank." | Drew Angerer/Getty Images Blue states find ways to undercut GOP tax law In states like New York, taxpayers would be better off than they were before Republicans changed the tax law.

Residents of some blue states may get a surprisingly big tax cut thanks to workarounds state lawmakers are crafting to subvert a controversial new cap on deductions for state and local taxes.

In places like New York, taxpayers will not only be able to claim the same break as before Republicans imposed a new $10,000 cap on the deduction, but they will also be able to sidestep longstanding federal rules on exactly when the deduction may be taken.


“They’re actually giving them a bigger tax break than they would have gotten under the previous law,” said Dean Zerbe, a former congressional tax aide and critic of the workarounds.

It’s a little noticed and unexpected dynamic in the partisan battle over the recent tax overhaul. The new SALT cap has been one of the biggest flash points, with Democrats from high-tax states complaining they were targeted by congressional Republicans. Now, months after the law passed, Republicans are having trouble convincing voters that they’re really going to benefit from the cuts the law enacted. Meanwhile, lawmakers in blue states are magnifying the cuts with their workarounds.

States say they are merely restoring what Congress took from them. But some of the states would go beyond that, giving their residents breaks unavailable in other states. What’s more, even as Democrats lambaste the new tax law as a giveaway to the rich, their workarounds would disproportionately benefit the well-to-do because they tend to have the most state and local taxes to deduct.

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New York, Connecticut and New Jersey have adopted proposals to allow taxpayers, to varying degrees, to evade the SALT cap by recharacterizing their state and local tax payments as charitable contributions. Similar proposals are pending in other blue states, such as California and Illinois.

The IRS warned last month that it may not allow the maneuvers, and many experts predict the issue will end up in court. Some say the tax agency’s announcement will be enough to scare many people from trying to take advantage of the workarounds, though lawmakers in Illinois don’t appear to be deterred. The state’s Senate pressed forward with its workaround, even after the IRS warning.

If the states prevail, taxpayers could benefit.

For years, taxpayers have been allowed to deduct their property taxes and either their state income taxes or their sales taxes, but not both their income and sales taxes. The workarounds would effectively allow people to deduct all three — an unlimited amount of property and income taxes and up to $10,000 in sales taxes.

Not just that.

They would also amount to undoing a long-standing prohibition on people subject to the alternative minimum tax from claiming the SALT break.

Together, that would amount to a tax cut for constituents potentially worth thousands.

And because of the intricacies of how the workarounds would operate, those tax cuts could actually end up producing revenue for state and local governments.

David Kamin, a former Obama administration aide who backs the workarounds, acknowledges they go beyond restoring the old rules. But he points the finger at Congress.

“It’s understandable why state leaders would potentially want to essentially give tax cuts to their population that doesn’t cost them revenue,” said Kamin, who now teaches at New York University’s law school.

“That’s not to say that it makes sense for Congress to have set up that incentive,” he said, adding lawmakers in Washington need to reconsider the SALT cap.

The specifics of the state programs vary, but they generally offer taxpayers a credit against their non-federal taxes in exchange for payments to state- or local-run charities, which then use the funds for government operations. That’s designed to allow taxpayers to characterize their tax payments as charitable donations, which remain fully deductible at the federal level.

The most expansive plan enacted so far is in New York, where people can turn both their property and income taxes into charitable contributions. Connecticut has a more complicated plan allowing similar treatment of property taxes and, in cases involving so-called pass-through businesses, income taxes as well. New Jersey’s plan allows only property taxes to be construed as charitable deductions.

But even after turning their property and income taxes into deductible charitable donations, taxpayers would still be able to deduct up to $10,000 in sales taxes under the current SALT break — even though Congress has not allowed people to deduct all three taxes for more than 30 years.

Congress began to allow people to choose between deducting sales and income taxes, alongside their property taxes, only beginning in 2004.

That could be significant in states like New York, which had the ninth-highest sales tax rate in 2017, according to the Tax Foundation.

“Now they don’t have to make a choice [between which taxes to deduct],” said Zerbe, national managing director at alliantgroup. “Now they get to have everything — all of the above.”

Rich Azzopardi, a spokesman for New York Gov. Andrew Cuomo, defended the state’s move.

"We are only aiming to restore balance for New York taxpayers who Washington politicians targeted as a piggy bank,” Azzopardi said.

Though the notion of deducting sales taxes may evoke images of people with shoeboxes full of receipts, the IRS allows people to automatically deduct a certain amount of sales taxes without having to track their spending. The so-called safe harbor amount varies by state and how many exemptions someone has. In Manhattan, a family of four earning $300,000 could automatically deduct $3,086, which would save them about $1,000, assuming they’re in the 32 percent tax bracket.

And taxpayers can add to that base by deducting sales taxes on major purchases, such as cars, boats and even airplanes and homes in certain circumstances.

At the same time, the workarounds could end up generating revenue for state and local officials because they are offering less than a 100 percent credit for payments to government-run charities. The way the math works, people will have an incentive to pay more in state and local taxes than they owe, because they will still come out ahead once the federal deduction is taken into consideration.

An example: A New Yorker owes $100 in state income taxes. Because the state offers an 85 percent matching credit, a taxpayer would have to pay $118 in order to cancel out that $100 tax bill (85 percent of $118 is $100). Though the taxpayer would pay $18 more than actually owed, that amount and more could be recouped with the federal charitable deduction. Assuming someone is in the 30 percent tax bracket, the taxpayer would get a $35 federal deduction on that $118 payment to the state.

“The state or local government is actually collecting more in tax revenue than they would have otherwise,” even as the person’s total taxes go down, said Jared Walczak, senior policy analyst at the Tax Foundation.

Kamin says he’s happy if people pay more than they owe because that means there is additional funding for critical state government programs.

“From the perspective of a progressive who wants states to be financing investments in services that have broader benefits, one would want states to be using this to raise additional revenue,” he said.

Still, it’s unclear whether the IRS will allow the maneuvers and an open question how many taxpayers will try to take advantage of the plans.

The IRS warning may be enough to deter some people, said Daniel Rosen, a former IRS lawyer and now a partner at the law firm Baker McKenzie.

“Many who would otherwise avail themselves of these regimes will be scared off, which I think was the intent behind issuing the [IRS] notice — to dissuade taxpayers in states like New York from taking advantage of the regimes, and to dissuade other states from following suit,” he said.

Taxpayers could not only end up paying more in state taxes than they owed, but could also end up in a fight with the IRS and subject to penalties if the deduction is not allowed.

Said Rosen: “There’s a cost to taxpayers for doing this.”

