STUMP » Articles » Setting the Stage 2018: Don't Fight High Taxes, Democrats! Embrace Them! » 11 January 2018, 06:29

I could use the dumbass “stages of grief” with respect to how various Democrats are scrambling to counteract federal tax law … Denial is a bit too late (they’ll never pass this law), and we got to see anger (EVERYBODY WILL DIE!), and all these “clever ideas” are their idea of bargaining, I suppose.

Though the “clever ideas” are extremely stupid, especially since they’re talking about them out loud. If you want your “loophole” to persist, you kind of have to not point out that’s exactly what you’re going for.

Anyway, let’s check a few opinion pieces from people who seem to be on the side of Democrats, but one really has to wonder.

DON’T FIGHT YOUR NATURE, DEMOCRATS

I came across this delightful article, and I have absolutely no interest in pointing out the many problems with it.

By Sean McElwee, it’s titled: Why are Democrats so afraid of taxes?

I don’t want to excerpt this thing of beauty, because it must be beheld to be appreciated. I will merely supply a few section headers, a pull quote, and the concluding paragraph:

DEMOCRATS LOSE WHEN THEY ABANDON CLASS RHETORIC
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DEMOCRATS ARE WRONG IN COMMUNICATING A MUSHY CENTRISM TO VOTERS.
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THE SUBURBS YEARN FOR CLASS WAR
….. Many strategists on the Hillary Clinton-end of things have rightfully noted that a shift in college-educated white support for Democrats is a positive harbinger for the party. But they have seemingly failed to grasp that the Bernie Sanders wing has a point: these voters can be won over on classic tax and spend social democracy. In 2016, only three percent of college-educated white Clinton voters made more than $250,000 a year, according to the Cooperative Congressional Election Study from that year. Far from worrying about taxes, these voters are increasingly worried about proving health care and child care for their children. Most have seen their retirement security erode and worry about whether their children can afford college. Instead of trying to appeal to a mushy center that doesn’t really exist, Democrats should embrace high taxes, particularly on the rich, to fund social services. The public is ready.

The Democrats should listen to McElwee. Don’t fight the limitation of SALT deductions. After all, you have to be pretty damn rich in income and/or property to exceed the standard deductions, forget about the SALT limitation of $10K.

Embrace that high tax lifestyle! Don’t fight it!

(Oh, by the way — having $250K+ in income is the top 3% at least in individual income, so all McElwee is pointing out is that the percentage of Hillary Clinton voters with high income is about the same as the population at large. I assume the percentage is about the same for Trump… may be less, of course.)

TRYING TO HELP RICH PEOPLE DODGE FEDERAL TAXES IS NOT A GOOD LOOK FOR DEMS

A little back down to earth from the LA Times.

Editorial Losers in the GOP tax plan, blue states are unwisely turning to tax evasion

Congressional Republicans say the $1.5-trillion tax cut they passed last month will produce far more winners than losers, with the typical family of four earning the median income saving more than $2,000 this year. But the losers will be easier to find in states with high tax rates and elevated property values — like, say, California.

That’s because the law slashes a tax break that was uniquely valuable to residents of those states: the deduction for state and local property, sales and income taxes. Starting this year, taxpayers will be able to deduct no more than $10,000 in state and local tax payments per household. By comparison, the average deduction for state taxes claimed by Californians on their 2015 returns was nearly $18,500. Depending on the taxpayer’s bracket, losing $8,500 in deductions could translate into a tax increase of more than $3,000.

…..
The Internal Revenue Service has blessed similar arrangements that California has used to raise money for college scholarships, and that several states use to preserve land from development or generate money for private school vouchers. But it’s one thing to offer a tax break to try to support a public project or service; it’s another to do it solely to cut Californians’ federal tax bills. Passing the De León bill would be the state’s version of setting up a shell company in the Cayman Islands in order to shelter Californians’ income.

Besides, the history of such donation-for-tax-credits schemes shows how vulnerable they are to abuse. Just one example: The Trump National Golf Course in Palos Verdes qualified for a multimillion-dollar state tax credit as well as a hefty federal tax write-off by granting an easement over 11.5 acres of its property to a local land conservancy, effectively preventing 16 homes from being built on the site. But the club had no apparent plans to develop the acreage — it was being used mainly as a driving range.

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In short, the new tax law produces winners and losers, as big changes in the tax code invariably do. With one of those changes hitting high-cost, high-tax states particularly hard, Californians are naturally suspicious and looking to fight back. There are reforms to the state tax code that could help reduce the maddening volatility of its revenue while also helping on the federal tax front — for example, by reducing income taxes in favor of new levies on carbon and services. But that’s not the approach taken by De León’s bill. Instead, it offers a clever tax-avoidance scheme, exploiting a loophole that Congress should have closed long ago to magically transform tax payments into “charitable contributions” — as if the state budget were a food bank or the Red Cross. Californians deserve a better tax overhaul than Congress just delivered, as do all Americans, but this isn’t the way to get one.

I will get back to the “easements” at the end of this post, but the main issue is that it’s a really ugly look for state Democrats to futz about with “clever tricks” that will solely help very rich people.

That multimillionaires are getting hit because they can’t deduct all their state taxes from their federal taxes is not going to inspire people from states such as Texas or Tennessee to pity for those poor, uh, um, unfortunate folks.

And it would only take Congress re-convening and pass more tax code updates to wipe out all the “cleverness” the states are trying to craft. Especially since nobody from these states were involved in crafting the first tax bill. What’s the leverage? That Republicans may lose a Senate seat in New York or California? What was that?

NOBODY WOULD BE FOOLED

From the Chicago Tribune: Editorial: Or they could just lower the taxes … Nah.

Unless you’re holed up on Gobbler’s Knob with Punxsutawney Phil, you know that a new law will limit to $10,000 the amount you can deduct on your federal return for state and local taxes. This is terrible for high-tax politicians in high-tax states. We’re thinking of one place with a struggling, jobs-challenged economy where citizens pay some of the nation’s most egregious property taxes, yet taxaholic lawmakers just raised the personal income tax rate by 32 percent. A place that’s losing population at an accelerating rate. Clue: Starts with “I,” rhymes with “unemploy.”

In the past, politicians could increase these state and local taxes to high heaven, then tell angry taxpayers to stop squealing: Hey, the IRS lets you deduct everything you give us. Those rubes in low-tax Idaho, South Dakota and Maine will subsidize you. Sweet!

Now, though, the limit on this deduction makes citizens in high-tax states likelier to rebel over the amount of Other People’s Money the pols collect. But never underestimate the yearning of the tax-and-spenders to defend their right to more revenue. Hence news stories about blue-state officials grasping for ways to game the new law.
…..
Struggle as we may, though, we can’t imagine Congress, the Internal Revenue Service and a nation of federal judges reacting to any such moves with a pliant, Shucks, you state people really showed us who’s boss. Just do whatever you want to flout federal tax law.

Legal experts find these blue-state notions for gaming the new limit dubious. What’s more, Democratic officials got some free tactical advice from University of Chicago law prof Daniel Hemel, who told The New York Times, “The Democratic Party’s long-term agenda requires the federal government being able to raise revenue. This would be short-termism at its worst, potentially setting back the progressive agenda for decades to come in response to a bad tax bill.”

Remember Hemel’s name. He’s going to be in the section below.

Note what you’re not reading here: quotations from state officials nationwide who understand that they have another option, lowering state and local taxes. That would make the new limit less burdensome for affluent citizens who’ll still itemize deductions. (A near-doubling of the standard deduction and federal tax rate reductions will make the new limit irrelevant for many middle-income taxpayers who’ll no longer itemize.)

We know, crazy talk. There are public employee unions to reward for the money and muscle they devote to re-electing friendly pols. There are interest groups that want higher taxes and more spending, not lower and less. There are governments that rely on rising revenue to employ precinct captains, nieces, brothers-in-law and other connected payrollers.

The problem is, states like Illinois really can’t lower their taxes. Even if they cut all their current spending, they have this huge debt overhang, especially with respect to pensions. They’ve got to feed that beast — or figure out how to cut it down to size.

They haven’t really figured out how to do that, yet.

If they’re willing to realize that they will never have enough money to feed that beast, and have to come to grips with it, that would be a place to start. But for now, I don’t think they understand what needs to be done.

They just know that more federal tax money getting siphoned off the rich people they’re trying to siphon from is a problem for them, specifically.

Even if they really can’t do anything about it.

LESS SANE VOICES: YOU CAN DO IT! HELP THE RICH DODGE THE FEDS!

Why states may get away with creative income tax maneuvers

Fearing that the new tax law will make it harder for them to raise enough revenue for public schools and other vital services, high-tax states such as California, New Jersey and New York are wasting no time in fighting back.

Other states are likely to follow suit as the benefits of these actions become clear, setting the stage for a bitter legal dispute over federal and state taxation.

As a tax law professor who researches the interactions between federal and state tax systems, I believe these initiatives are likely to succeed in softening the impact of the new tax law on residents of high-tax states.

This is the Hemel I said to remember. He’s a tax law professor, as he said. Let’s look up his CV. He’s got plenty of publications to his name, so let me see if any seem relevant.

Below are a selection of taxation-related articles that may be related to what he’s on about.

Journal Articles

“The Federalist Safeguards of Progressive Taxation,” 93 New York University Law Review __ (forthcoming). ssrn

“Inequality and the Mortgage Interest Deduction,” __ Tax Law Review __ (forthcoming) (with Kyle Rozema). ssrn

Comment, “Should Tax Rates Decline with Age?,” 120 Yale Law Journal 1185 (2011). cu www

Other Publications

“Taxation as Compensation (reviewing Kenneth Scheve and David Stasavage, Taxing the Rich: A History of Fiscal Fairness in the United States and Europe),” The New Rambler, May 25, 2016. www

Okay, that’s really not a lot, and some of these aren’t really all that relevant to the current discussion.

I didn’t list all the taxation-related publications, though. Here are the rest:

“Can New York Publish President Trump’s State Tax Returns?,” 127 Yale Law Journal Forum 62 (2017).

“How the States Can Make President Trump’s Taxes Public,” Vox, May 8, 2017. www

“How New York Can Release Trump’s Tax Returns,” Politico Magazine, May 2, 2017. www

“There’s a Quick and Easy Way to See Trump’s Tax Returns,” Washington Post, April 11, 2017. www

Think there’s a theme, there?

While past performance does not necessarily indicate future results, I will point out:

New York state has not released any of Donald Trump’s state tax returns. I’m pretty sure I would have remembered if they did.

This is the guy you’re pinning your hopes on? You might want to rethink that… and this is a bit more important than trying to embarrass The Donald with whatever financial details you imagine are in his tax returns.

HELP EVERYBODY DODGE THE FEDERAL TAXES!

But let’s see what Hemel has to say:

Payroll please

Here’s how the payroll tax change, which New York Gov. Andrew Cuomo mentioned his State of the State speech, would work.

Let’s say your employer pays you $100,000 a year and you pay $5,000 in state personal income taxes, leaving $95,000 before federal taxes and other charges.

What if instead your employer paid you $95,000 in wages and also paid a $5,000 payroll tax to the state? Your employer would be no worse off, with its out-of-pocket cost still totaling $100,000, and the new tax law preserves an employer’s ability to deduct payroll taxes from their own tax bills.

And you generally would be no worse off either, as you would still have $95,000 before dealing with your federal tax bill.

Indeed, you would most likely fare better financially once federal taxes are factored in. The federal government would tax you on $95,000, whereas you would be taxed on the full $100,000 if the state did not adopt the payroll tax workaround and if you could not claim a SALT deduction.

That would be the case if you claim the standard deduction – as at least nine-tenths of taxpayers will – or if you hit the $10,000 SALT cap based on property taxes alone. Depending on your federal tax bracket, the savings could increase your after-tax income by anywhere from 0.6 percent to 3.1 percent.

Oh, so you really want to cheat the feds out of taxes, in favor of New York — not only would it beat down the taxes on high-income people, but low income people could theoretically get a double boost — they get to use the standard deduction (which they probably would have before this) and have a lower income base to begin with! Genius!

Sounds like an awesome policy coming from the Democrats. Starve the beast! Drain the swamp!

Of course, New York wouldn’t get any money from me under such a deal. And there’s the whole property tax issue, which might be a problem for the really wealthy people here in New York.

And the “charity” idea:

Charity begins at home
And here’s how the charitable credit idea would work: Say your state offers you a 90-cent credit against state taxes for every dollar you give to an in-state university or local community college. The IRS determined in a memo in 2011 addressing a similar program in Missouri that the full $1 donation would be a deductible charitable contribution, notwithstanding the state tax credit you get in return.

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More than a dozen states already have implemented tax credit programs like this to finance private school vouchers. Nothing would stop them from extending these programs to finance state universities, community colleges, K-12 public schools, hospitals, parks and more.

Again, when you have to feed the state that money, it’s not really a donation, as per the prior post on this idea.

This loophole would be very easy for the IRS to close on its own, not even involving Congress. The IRS disqualifies “charities” plenty. Ask the whole Tea Party charitable orgs about that.

Lingering questions

The payroll tax idea would work best for the majority of workers who earn wage income and who will claim the standard deduction under the new federal tax law. The charitable contribution credit, in contrast, would be more likely to benefit higher-income households who continue to itemize deductions for federal purposes.

The payroll tax idea would go one better — these people would pay even less in taxes than without the shenanigans (if done right). Before, they’re just deduct the standard deduction, because it would be more than the state income taxes they paid.

But now they could deduct both the payroll taxes and the state income taxes. Clever….

The IRS of course could revoke its 2011 memo that blessed the charitable arrangements already out there. But decades of judicial precedent, which the agency on its own can’t undo, supported that memo. Moreover, with similar tax credit programs that finance private school vouchers popular among the Republican Party’s base, GOP lawmakers may resist moves to end such credit arrangements.

Awesome, if the Democrats come in for private school vouchers! With 100% deductibility off of state taxes!

Because shoving money into public schools, when you’re required to pay state taxes, wouldn’t be charity. But funding private schools would be charity. Clever.

I say the various high tax states should go for it, especially the payroll tax idea. I think it will look very well in national politics and win Democrats votes.

[note: I am a registered Republican. If you trust anything I say above… well… that’s your problem. Not mine.]

TRYING TO SLOW THE GROWTH

Meanwhile, in Albany…

NY State senator Jim Tedisco:

My Senate colleagues and I today sent a garlic necklace and a stake through the heart of New York’s tax and spend vampires by passing legislation to cap state spending and make the property tax cap permanent!

The property tax cap, which I helped author when I was in the Assembly, has saved taxpayers over $41 billion statewide and over $343 million in the 49th Senate District to date.

Passing a 2 percent spending cap is important because if we’re going to ask our local governments to only spend what’s in their means than we should expect the same out of our state government.

Part of our legislative proposal responds to a question I’m most asked by seniors who have been paying school taxes for years upon years: “Shouldn’t there be a point when we can stop paying school taxes?”

This proposal today freezes and then fazes taxes out for seniors using STAR guidelines. It also includes a 25-percent increase in the size of the current property tax rebate checks for homeowners.

Time to start making New York more affordable to create jobs, keep more money in people’s pockets, help small businesses grow and stop the migration of people out of our state!

Hmmm, seems like this could be an opportunity for the NY Republicans… if they can ever get their acts together.

MORE ON STARVING THE FEDERAL BEAST

Charity workaround to new federal cap could save New Jersey residents money, Democrats say:

New Jersey homeowners facing higher federal taxes because of a new cap on deductions could potentially save money through a workaround proposed Friday by two Democrats.

The plan, outlined in Fair Lawn by Gov.-elect Phil Murphy and Reps. Josh Gottheimer and Bill Pascrell, calls for municipalities to set up charitable funds and then give homeowners credits on their property tax bills for what they donate.

…..
Under the New Jersey and California plans, contributions to the municipal or state charity funds would be voluntary. And they would only be beneficial for people who itemize on their taxes, a group that is expected to shrink in coming years because of the increase in the standard deduction.

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The IRS has long required taxpayers to subtract the value of anything they receive in return for a charitable contribution before taking a deduction, so someone who gets a $5 tote bag for a $50 donation to a public TV station, for example, can only deduct $45.

But the IRS has also said that the value of the deduction itself in terms of federal tax avoided does not have to be subtracted, said Kirk J. Stark, a tax law professor at the University of California-Los Angeles School of Law.

As recently as October 2011, the IRS chief counsel reviewed a Missouri law that provided a 25 percent state tax credit for contributions to domestic violence shelters and decided that benefit would not be treated the same as a public television tote bag.

“The tax benefit of a federal or state charitable contribution is not regarded as a return benefit that negates the charitable intent,” the IRS memo said, citing federal tax court rulings in 1985, 1989, and 1991.

Stark said the IRS could change its ruling to address what California and New Jersey are looking to do, but it would not be easy.

“The IRS could disavow the memo, but to do that, they would have to contend with the fact that the prior memo is a reflection of deeply embedded principles of law applied in a bunch of different settings,” Stark said.

I can think of some really easy ways it would be undermined.

Unfortunately for states like New Jersey, they’re very dependent on high income people for their property and income taxes.

Said “donations” would have to go to actual charity funds — like private school vouchers or domestic violence shelters. Not to the state general fund.

Also, the prior letter was a 25% tax credit. Not a 100% tax credit. I think the IRS would be able to look at a “letter ruling” from 7 years ago and say “you know, the details are different now”.

But it could all be moot.

Congress could come back with: “Nuh uh, here are this IRC amendments, and you can’t deduct this stuff any more.”

It would be a very short-lived cleverness, that’s for sure.

And the payroll tax could similarly be nixed.

Should be fun to see how that plays out. The people actually negatively affected by the new changes are very high income and high wealth. I’m fairly high income/high wealth for the country, and I don’t get harmed by the new bill, from my figuring. The high-tax states are grasping at straws to try to limit the hit to people much richer than me, and I love hearing the explanations, especially when some of the “fixes” reduces taxes even more on lower income people (or, in progressive states like New York, would actually make it worse unless they could credit money back… which would then screw up these people’s federal taxes.)

And the ending of the article is particularly nasty:

They include not just the school voucher programs, but also more widespread programs that provide real estate developers incentives to preserve land on which they could otherwise build.

“Tax credits for donations of conservation easements have become a popular thing to do,” Stark said. “Before he became president, Donald Trump made several donations of conservation easements over the years.”

I said that “easement” word would come back. know about those. They help keep property values high for rich people, because they prevent development of high density housing or commercial use on said easements. Thus keeping out the riff-raff, you see.

In my own area, we have the North Salem Open Land Foundation:

From this beginning, NSOLF has grown dramatically. NSOLF currently owns 25 parcels of land, totaling roughly 753 acres and holds conservation easements over another 469 acres. These 1222 acres will remain preserved and undeveloped forever and most of this land is available to the public for walking, riding, cross-country skiing and other forms of passive recreation.

On top of the privately-bought land “protected” from development, we have land owned by the state that is definitely protected from development because it’s part of the Croton Reservoir system, which is a huge water source for NYC.

In the name of conservation, but mainly to keep places like Croton Falls from looking like Mount Kisco. And yes, it’s fairly rich people funding this. There are tax benefits, too.

Thing is, the state needs those income tax payments for the general fund, not for land conservation funds where the land is owned privately.

In any case, the clock is ticking in the high tax states.

If they want the payroll tax thing to work, they have to put that into place ASAP… and they probably can’t do that before most people see their reduced withholding on paychecks in February.

The charitable donation idea only needs to be put into place before the end of the year, but with enough time for rich people to “donate” to the state… and maybe Congress will shut down the “loophole” before any state attempts it. But we’ll see. This is going to keep coming up in 2018.