Crain’s Chicago Business: State lawmakers look for a Trump tax cap workaround

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April 11th, 2018
Greg Hinz

State lawmakers are nearing a key test on whether Illinois will follow the lead of California, New York and other states and enact legislation designed to let Illinois taxpayers avoid a new cap on deducting state and local taxes on their federal income tax return.

Awaiting a final vote in the House is a bill sponsored by freshman Democrat Jonathan Carroll of Northbrook. The measure specifically would give taxpayers a credit against state income-tax liability for contributions to a new state-chartered charity that would be used to support public grade and high schools in the state.

Under President Donald Trump’s new federal tax rules, deductions for state and local taxes—known in Washington lingo as SALT—are capped at $10,000 a year, a figure low enough that a fair number of taxpayers will lose out here. But there’s no limit on charitable deductions under the new U.S. rules, so Carroll’s bill—if upheld by the Internal Revenue Service—effectively provide a workaround that could benefit many local taxpayers.

Carroll said his measure is based on one being considered in California, and said the potential savings to Illinois taxpayers “has to be in the hundreds of millions of dollars a year.”

The GOP tax bill limits the deduction that individuals can take for the state and local taxes they pay, capping it at $10,000

“The fact is, the new federal tax code inordinately hits states such as Illinois that have relatively high state and local taxes, Carroll told me. “I don’t understand why states such as ours should be hurt.”

Carroll said he could call the measure vote a House vote almost anytime now, and believes the outcome will be close but favorable. Other Springfield insiders say a House vote easily could be delayed until later in the spring as the House works on other matters.

But significantly, spokesmen for both House Speaker Mike Madigan and GOP Leader Jim Durkin say they favor passage. “The bill does have some appeal,” said Madigan spokesman Steve Brown. And given that the IRS recently approved prepayment of some property tax bills to avoid the caps, “Perhaps they’ll support this too.”

If the measure clears the House, Senate Executive Committee Chairman Don Harmon, D-Oak Park, said he’ll likely sponsor it in that chamber.

Earlier:

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Harmon has been researching both the California measure and a different idea in New York state that would allow employers to pay a fully-deductible payroll tax that could be written off on federal returns. But he said he’s decided the idea of a voluntary contribution to a charity makes sense, though there is “some question” whether the IRS will approve.

Gov. Bruce Rauner has no official position. A source close to him tells me he believes the IRS will reject such a plan.

But that source did not promise a veto, and the reason seems obvious: While Rauner argues that the new federal rules provide a good reason to adopt some of his plans and reduce local property taxes, it’s hard to see a governor running for re-election vetoing a bill that would provide significant tax savings to tens of thousands and maybe hundreds of thousands of voters, many of them in affluent, GOP-leaning neighborhoods and towns.

Some experts consider IRS rejection of such a plan as extremely likely, if only because charitable contributions are not supposed to confer a benefit on the donor. But the measure almost certainly would end up in court, with no firm timetable on when a decision would come.

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