WASHINGTON—Chairman of the House Ways and Means Committee Kevin Brady (R-Texas) is warning blue states that create tax maneuvers to avoid the new limit on state and local tax (SALT) deductions. He said their schemes will fail and their taxpayers will “bear the brunt” of these gimmicks.
“They are going to lead their local taxpayers into a very bad situation,” he told The Epoch Times on June 26.
“The states, through their tax evasion gimmicks, will actually expose their local taxpayers to recourse from the IRS.”
Under the 2017 Tax Cuts and Jobs Act, the tax reform bill passed in December, taxpayers who itemize their deductions will be subject to a cap of $10,000 on SALT deductions. States with higher individual income and property tax rates have objected to this cap and have created new ways to avoid the limit.
New York, New Jersey, and California are some of the states that are attempting to use charitable contributions as a workaround to the new federal limit.
The states are setting up charitable trusts for education or general welfare purposes so that taxpayers can reduce their property tax liability by making a contribution to the charitable trust. This will allow taxpayers to receive a tax write-off.
Brady criticized blue states with high tax burdens seeking these workarounds.
“These schemes won’t work. Treasury has already made clear they’ll be denied,” he said.
He urged the states to stop spending their time on “tax evasion and gimmicks” and spend time lowering their “crushing tax burden on families and local businesses.”
New York was the first state to create a SALT deduction cap workaround.
Gov. Andrew Cuomo signed legislation on April 17 providing new options for tax-deductible charitable contributions. Under the new law, the state-operated charitable funds permit taxpayers to claim a state tax credit of 85 percent of the donation to health care and education funds.
According to Brady, the focus will return to the mayors and governors who try to evade the federal law.
“Now the curtain has been pulled back and local families and businesses know just how brutal their state governments and cities are taxing them, almost out of existence,” he said.
Illinois, Connecticut, and Rhode Island are other states that plan to skirt the federal deduction limit through deductions for charitable contributions.
The states claim that they are not creating a tax loophole as this charity contribution mechanism has been in place and operating with no IRS objection for years in states like Missouri and Arizona.
Brady said it would be wrong to compare these relatively small programs with schemes that circumvent the federal limit.
“They are going to lose in court and their taxpayers ultimately will bear the brunt of their state gimmicks,” he warned.
New Tax Bills on the Way
Speaking at a Washington Post event on June 26, Brady said Republicans are open to making improvements and fine-tuning the tax code. He said they are working on tax reform version 2.0, which will seek to make individual provisions permanent.
Under the new tax code, many individual income tax provisions, including the child tax credit, will expire by the end of 2025, and the old rules will take effect unless the provisions are extended.
“Permanence without a doubt is the No. 1 request for middle-class families and for those working in small businesses,” Brady said, adding that permanence creates certainty and contributes to growth.
Republicans are also willing to make a change in the area of retirement savings to encourage Americans to save more and earlier in life, he said.
According to the timetable, the House Ways and Means Committee may begin circulating a draft to House Republicans after the July 4 break. The legislative outline may be released in early August and the voting may be held in the fall, Brady said.
“I don’t see it as one bill. I see it as a package of two, three, or four approaches with permanency being one of them,” he said.
The Tax Cuts and Jobs Act reduces the top corporate tax rate from 35 percent to 21 percent. The bill also offers a 20 percent deduction for pass-through entities.
On the individual tax side, the bill keeps the existing seven brackets but reduces the individual tax rates. It also narrows itemized deductions to simplify the tax code, while doubling the standard deduction for individuals from $6,350 to $12,000 and for married couples filing jointly from $12,700 to $24,000.
The new code expands the child tax credit from $1,000 to $2,000 for both individuals and married couples filing jointly.
According to Brady, wage growth is a long-term issue in the United States, but tax reform will ultimately solve this challenge.
“We are seeing wage increases for the first time in nearly 10 years, in the first quarter,” Brady said.
“And the best is yet to come on tax reform,” he said, adding that much of this new code was designed to bring back jobs, investment, and innovation to the United States.