Several bills have advanced in the California Legislature in recent weeks that are expressly designed to spite the Trump administration and mitigate a change in the federal tax code that will cost higher-income Californians.
The Republican tax overhaul limited state and local income and property tax deductions, called SALT, to $10,000. Previously, the taxes were fully deductible. The change primarily affects upper-income residents of higher-tax states, which are generally more Democratic.
Democrats charge it’s a plot to draw money from their states. “This tax scam deliberately targets Americans in blue states that quite frankly didn’t vote for Donald J. Trump,” Democratic state Sen. Kevin de León told a committee last month. “Three million Californian taxpayers will lose out on thousands of dollars of valuable deductions each year on their federal taxes.”
De León has authored a measure that would create a new state education fund. Under the plan, taxpayers could donate to the fund, receive credits to wipe out most of their state and local income taxes, and then deduct the donations on their federal returns as charitable giving.
The measure has passed the Senate and is scheduled to receive a vote in the Assembly appropriations committee, after the Legislature returns from recess in August. Lawmakers are still working out specific kinks, and could ask voters for help on the November ballot.
Other, similar measures would expand an existing state tax credit for Cal Grants and create a new credit for nonprofit giving. Supporters of the concept point to court decisions and IRS rulings that have allowed such tax credits in the past in more limited capacities. New York has already passed its own legislation to circumvent the SALT deduction cap, including creating a charitable contribution option.
The conservative Tax Foundation urged the elimination of the SALT deduction in the tax overhaul, arguing it incentivized states to increase taxes. The foundation warns the state proposals are legally dubious. The IRS has threatened to challenge state attempts to circumvent the tax changes.
“Despite these state efforts to circumvent the new statutory limitation on state and local tax deductions, taxpayers should be mindful that federal law controls the proper characterization of payments for federal income tax purposes,” the IRS said in a notice in May.