One of the immediate reactions to the tax law overhaul and its limitations on the deductibility of state taxes has been states searching for ways to minimize the impact of the new law on their taxpayers. One obvious approach, the reduction of some of the extremely high income, property and sales taxes will likely not be considered at all. That is, of course, because the desire of states to minimize the impact on their taxpayers really is a desire to keep the flow of tax money coming in while hoping taxpayers remain in the state to pay it.
A more interesting solution which has been suggested by more than one source is that taxpayers be allowed an option that their payment of taxes be treated as being made to a state-run charity, allowing the taxpayer to deduct the payments as a charitable donation so as to avoid the $10,000 limit on the deduction of state taxes. If effective, this technique would allow taxpayers to claim the same or at least similar deductions for various payments to states as they could under the prior law.
Of course, the problem with this idea will be to ensure that it complies with existing regulations and rules which address the deductibility of charitable donations. One of these rules is the requirement that the taxpayer receive nothing of value in return for the gift to the charity. If the state tax obligation – whether income, sales, property, excise or other taxes – is not voluntary but is required and enforced by penalties and perhaps jail time, then it is hard to argue that the charitable gift option is voluntary and without a substantial benefit granted to the taxpayer in return. That would defeat this approach to obtaining the deduction.
A related approach is allowing taxpayers to make donations to charitable funds run by municipalities for such purposes as schools. The donations could be met with tax credits for the taxpayers making those donations. The problem here again lies with the quid pro quo since the value of the deduction should be reduced by the value of what the taxpayer receives in return.