STUMP » Articles » Taxing Tuesday: Our Clever Ideas are Totally Going to Work! Please Billionaires, Don't Leave! » 1 May 2018, 20:54

So, Illinois and New York and other places have started getting legislation together to supposedly help their highly-taxed folks reduce their federal taxes (because only the states/localities should fleece their residents, dammit!)

The thing is, the IRS hasn’t given any indication whether any of this will be considered legit. Maybe some legislation actually has to go through Congress, hmmm?

So I’ve been seeing an uptick of self-talk of how this is all going to work out just fine, and nobody will get screwed.

Trump tax-cap workaround picks up steam—and some legal backing

Legislation designed to give Illinois residents a way around President Donald Trump’s $10,000 cap on deductions for state and local taxes remains on a fast track in Springfield, with Sen. Julie Morrison, D-Deerfield, picking up sponsorship of the bill that last week overwhelmingly cleared the House.

​ The measure is assigned to the Senate Revenue Committee and Morrison says she’ll waste no time dealing with a subject that “probably is one of the most important issues I hear about in my district. This is exactly what people are looking for.”

Morrison already has picked up 10 co-sponsors—only 30 votes are needed to pass a bill in the Senate—and she’s hopeful “a large number of Republicans” will soon sign up.

…..
But now, a Chicago tax law expert who has researched the issue says he’s concluded conventional wisdom is wrong, and the proposed workaround “might just work.”

In his opinion, Andrew Szymulanski essentially argues the proposed charity would not provide donors a quid pro quo that would be rejected by the IRS, but is more like a normal state tax deduction of the type the IRS usually OKs without a problem.

“As a matter of principle, tax attributes created pursuant to a (sovereign state’s) taxing powers are treated as having no value. The issue has been addressed previously in the context of U.S. domestic as well as U.S. international taxation,” Szymulanski writes. Indeed, IRS attorneys have found “a tax benefit in the form of a state tax credit was not distinguishable from the benefit of a state tax deduction, and was therefore not considered to confer a benefit on the donor.”

The IRS has indicated that might not be the case under “unusual circumstances,” Szymulanski concedes. And, to be sure, state lawmakers perhaps ought to make the credit only partial, providing only 85 cents of tax reduction for every $1 contributed, he suggests.

Ha, that will be popular. TAX THE RICH EVEN MORE!!!!!

HA HA HA.

Okay, this is a Chicago tax law expert. Let’s check out this guy’s blog post first.

COMMENTS FROM THE TAX EXPERT

Not-So-Charitable Giving—Illinois Wants to Help You Maximize Your Federal Tax Deductions

Illinois legislation aims to circumvent Federal tax law limiting the deduction for state and local tax (“SALT”) by substituting it with a charitable contribution deduction. Does the proposal pass muster?

As counterintuitive as it might seem, it just might work.

…..
Quid Pro Quo Not Allowed

So, how does this gambit overcome the obvious objection that a contribution is not truly a gift if one receives a benefit in return? After all, a quid pro quo exchange cannot form the basis of a charitable contribution. IRS Pub. 526 summarizes this point succinctly by reminding taxpayers to deduct only the amount of the contribution that is more than the value of the benefit received.

EXAMPLE: You paid $70 to a charitable organization to attend a fund-raising dinner and the value of the dinner was $40. You can deduct only $30.

The Supreme Court took up this issue in U.S. v. American Bar Endowment, 477 U.S. 105 (1986). Attorneys claimed charitable contribution deductions under IRC § 170 for payments to the American Bar Endowment (“ABE”) which provided them with insurance coverage. However, the attorneys failed to prove that their payment exceeded the benefit they received in the form of insurance coverage which the court reasoned would be measured by the price of premiums for comparable coverage purchased from third parties.
…..
If this precedent applied, Illinois taxpayers making contributions to the Illinois Education Excellence Fund would not be considered to make “charitable contributions” because of the dollar-for-dollar tax benefits they expected to receive in return. But does the precedent apply?

“A Reduced Tax Is not an Accession to Wealth”

Interestingly enough, it does not. And, the reasons go to the fundamental nature of how federal tax law treats the benefits and burdens flowing from a sovereign’s exercise of its taxing authority. As a matter of principle, tax attributes created pursuant to a sovereign’s taxing powers are treated as having no value. The issue has been addressed previously in the context of U.S. domestic as well as U.S. international taxation.
…..
Potential Challenges

Some commentators have suggested that state proposals which grant less than a dollar-for-dollar credit for charitable contributions to their “contributions-in-lieu-of-taxes” funds stand a better chance of surviving measures designed to shut them down. Whether the state grants a 100 percent or 85 percent credit should be irrelevant to the benefit analysis under present law. A state tax credit is deemed to have no value. However, caution is warranted. After a thorough exposition of the relevant legal precedent, a group of law school tax professors found it difficult to prognosticate the outcome of any potential challenges.

Ya think?

Look, this could go a number of ways. Congress could revisit the issue and say “You know what? We were wrong. To be fair, we will disallow any state/local tax deductions.”

I think that’s the fairest way to resolve the matter re: federal taxes. Why should they incorporate anything regarding state taxes? Indeed, it simplifies matters – you don’t necessarily have to link up doing your state and your federal income taxes at the same time. Sounds like a win for everybody.

WAPO: THE RICH ARE MAKE OUT LIKE BANDITS WITHOUT SALT CAP

This is rich:

Democrats’ tax plan looks an awful lot like a big giveaway to the wealthy

Did the WaPo people realize what they just put out there?

Jeff Stein is a policy reporter on The Washington Post’s Wonkblog team. Before joining The Post, Stein was a congressional reporter for Vox, where he wrote primarily about the Democratic Party and the left. In 2014, he founded the local news nonprofit the Ithaca Voice in Upstate New York. Follow @jstein_wapo

I assume Jeff Stein is *pro-*Democrat. But he just showed that yes, the SALT cap does screw the very high income people, and not so much the lower income folks.

Huh.

Connecticut lawmakers are considering a similar idea to set up local charitable funds to help residents get around the deduction limitation. “[The GOP tax law] is nothing more than a massive giveaway for the very wealthy while the middle class pick up the tab,” Malloy said in a statement. “The actions we are proposing aim to protect Connecticut residents and businesses, who are specifically targeted by this law.”

Hmm, that’s not what I see. I see really high income CTians getting hit by the SALT cap.

Do these people listen to themselves?

Yes, I did read the whole piece, and they’re claiming that the high income folks already are getting a tax cut from the bill….

…..but for some reason the state legislatures are compelled to try to help these people cut their federal taxes further.

Out of the goodness of their hearts, not because lots of these high income folks actually end up with higher federal taxes, right?

PLEEEEEASE DON’T GO!!

Of course, the reason that places like CT and NY are so concerned about the SALT cap is that it does hit high income people the most — they actually may end up paying more in federal income taxes than under prior laws.

And these are the cash cows these states desperately need to pay for all the goodies they’ve promised.

The great exodus out of America’s blue cities:

Am I the only one in my spinning class at Equinox in Manhattan who’s fed up paying $200 every month for a gym with clean showers, $3,000 in rent every month for an apartment without cockroaches and $8 every morning for a cup of coffee? Am I the only one moving through the greater part of New York City boroughs and seeing an inexorable march of urban decay matched with the discomfort of crowding and inexplicable costs? I know I am not.

New York is the most expensive city in America.

….
Eventually, city and state taxes, fees, and regulations become so burdensome that people and corporations jump ship. More people are currently fleeing New York than any other metropolitan area in the nation. More than 1 million people have moved out of the New York City metro area since 2010 in search of greener pastures, which amounts to a negative net migration rate of 4.4 percent.

…..
The cost of popular moving truck services, like U-Haul, is largely created through the ironclad rules of supply and demand. Turns out, there is much higher demand for trucks leaving high-tax blue states heading to low-tax red states than vice versa.

A route from California to Texas, for example, is more than twice as expensive as a route from Texas to California. Want to go from Los Angeles to Dallas? $2,558. Returning back? $1,232. Texas is the No. 1 state people move trucks to, with states like Florida, South Carolina, Tennessee, North Carolina and Colorado rounding out the top 10. The states people are fleeing? New York, New Jersey, Massachusetts, Michigan, Pennsylvania, Illinois — and at the top, California.

Note: these moves occurred before the SALT cap. Can you imagine how bad it will be after?

I think you can understand the desperation.

The only way to slow the great exodus out of America’s blue meccas is to make these areas more affordable for middle-class families; the most significant way to do that is to lower state and city income taxes. And if residents don’t want to be “double taxed” following the removal of SALT deductions, the solution is simple: remove state and city income taxes altogether.

What an idea!

But they can’t.

They have all this debt overhang, specifically in the form of pensions.

BLAST FROM THE PAST: DEPENDENCY ON BILLIONAIRES

I thought I’d throw back to Connecticut’s dependency, in particular, on about a few dozen taxpayers in the state… maybe fewer than that.

June 2016: Connecticut Update: No Billionaire Left Behind

BRIBE THE BILLIONAIRES

This reminds me of the old saying — if you owe the bank $100K but have trouble paying it back, you have a problem. If you owe the bank $100 billion and have trouble paying…. the bank has a problem.

If the state has a lot of rich people/companies it can soak, and you’re a rich person concerned about taxes, you have a problem; if the state finds this revenue source drying up, it has a problem
…..
Oh look. The pensioned people outnumber the “rich”. Almost 100 billionaires in New York, and CT has to hobble along with only 12.

I can see why they have to bribe any of them from leaving with their yummy revenue sources.

Even if NY is better.

From even earlier – 2015: Public Finance Follies: When You’re Too Dependent on Very Few People :

The real general revenue for [Connecticut] was: $25.4 billion

Of that, $16.2 billion was total taxes.

Of that, $7.1 billion was individual income taxes. Around 40% of total taxes come from individual income taxes.

And a huge portion of those taxes come from very high income people.
…..
In any case, Connecticut is so dependent on a very few people for a large portion of their revenue, they keep extremely close tabs on those people:

‘Connecticut, home to some of the richest Americans, has a big stake in the billions of dollars in revenue their income taxes generate. State tax officials track quarterly estimated payments of 100 high net-worth taxpayers and can tell when payments are down. Of that number, about a half-dozen taxpayers have an effect on revenue that’s noticed in the legislature and the state Department of Revenue Services.

‘“There are probably a handful of people, five to seven people, who if they just picked up and went, you would see that in the revenue stream,” said Kevin Sullivan, the state’s revenue services commissioner.’

That is pretty bad. For one, there is an obvious opportunity for corruption. Those 5-7 people want a special deal/perk that doesn’t come out of the revenue stream? You’d better cater to their wishes.

Thus, the scrambling to try to design a tax loophole for those few dozen people.

The extremely rich in both income and wealth.

No, it’s not about protecting the (over-taxed) middle class in Connecticut. It’s about making sure that Connecticut can continue to suck off that sweet sweet tax money.

And soon, those people may be thinking: you know, I could probably berth my sailboat in Florida… I don’t need to keep sailing around the Long Island Sound. I could actually buy a hat and some sunscreen… it would be okay.

My conclusion from that 2015 post:

In any case, if you want a plutocracy, one of the best ways to get there is to have the richest people paying for the bulk of the government. These people are not only mobile but know several legal ways to reduce their tax hit (such as adding to the large endowments at Harvard or Yale).

Please don’t tell me that the federal tax bill provided a huge payoff to rich folks.

The reason the high tax states like CT, NY, and NJ are having a cow is that these people don’t get to shelter quite so much of the hit they take from the state. I wouldn’t be surprised if some of them paid more in state taxes than federal taxes.

YEAH, THEY’RE GONNA LEAVE

800,000 people are about to flee New York, California because of taxes

800,000 people will leave New York and California over the next three years due to the new tax bill, conservative economists Arthur Laffer and Stephen Moore said in an op-ed in the Wall Street Journal.

Other economists dispute this finding, say there is no connection between taxes and migration.

These economists claim high-tax states will likely generate more wealth than they lose.

Conservative economists Arthur Laffer and Stephen Moore are predicting a new mass exodus of wealth from New York and California because of the new tax law. But academics who have studied taxes and migration call the forecast “pure nonsense.”

In an op-ed in the Wall Street Journal headlined “So Long, California. Sayonara, New York,” Laffer and Moore (who have both advised President Donald Trump) say the new tax bill will cause a net 800,000 people to move out of California and New York over the next three years.

The tax changes limit the deduction of state and local taxes to $10,000, so many high-earning taxpayers in high-tax states will actually face a tax increase under the new tax code.

Laffer and Moore say that the effective income-tax rate (what people actually pay) for high earners in California will jump from 8.5 percent to 13 percent. Wealthy Manhattanites would face a similar increase, they say. Those who make $10 million or more will see a potential tax hike of 50 percent or more, according to their analysis.

You can read the various refutations, and all I will say is: we shall see.

I could be wrong about IRS doing the smackdown (next April, just to screw over everybody), I could be wrong about a lot of things.

But I have been listening to my older coworkers in Hartford. Some of them are questioning why they can’t move to Florida or Texas and work remotely. Or heck, work for one of the many companies that have already moved to lower-tax locales.

Why indeed.

I’m willing to pay a premium to live in New York… for now. But there is a point at which I’d have to up and move elsewhere. And I would just go.

When people become unstuck, it can happen rapidly.

It happened in Puerto Rico.

That projection was in 2015. Before that big hurricane last year, that you may have heard about.

It also happened in Detroit… but I’m going to leave that story for tomorrow.