California’s effort to dodge President Trump’s tax plan faces political and practical challenges

A complex proposal to help Californians evade a provision in President Trump’s federal tax plan faces key questions even as its author is working toward the bill’s speedy passage: How much would the plan ease Californians’ new tax burdens, and would the Trump administration let it happen?

The state legislation would create a state-run nonprofit, the California Excellence Fund, to accept donations to fund schools, road repairs and everything else in the state budget. The donations would allow residents to reduce their state income tax payments and also receive a federal charitable tax deduction.

The bill’s author, State Senate President Pro Tem Kevin de León (D-Los Angeles), introduced the measure this month after Trump signed an overhaul of the federal tax code. The federal plan caps state and local tax deductions at $10,000, a blow to residents in high-tax California.

De León hopes the nonprofit gambit will preserve Californians’ federal tax deductions and keep state revenue stable.

“It’s my job to protect all Californians,” said De León, who is also running for U.S. Senate. “That’s what I’m doing for this piece of legislation: to protect all Californians from double taxation.”

The legislation, Senate Bill 227, addresses a federal tax concern faced primarily by a subset of higher-earning Californians. About 2.5 million single and joint filers in California — comprising 15% of all returns — claimed more than $10,000 in state and local tax deductions in 2015, the most recent data available, according to the state Department of Finance. Nearly 90% of those filers reported annual incomes of $100,000 or more.

Under the legislation, taxpayers — or their accountants — would have to estimate how much they would need to pay in state and local taxes before the end of a tax year. If the total is larger than $10,000, they would need to decide whether to make a donation to the state fund in the same year to receive a federal charitable deduction.

Another complication is that a donation to the state fund can only reduce taxpayers’ income tax payments, not property taxes, which are paid locally. For instance, if a taxpayer owes $15,000 in property taxes but only $5,000 in state income taxes, that taxpayer’s state and local tax obligation would be $10,000 over the new cap on those deductions, and a donation could only help offset the income tax portion of the bill.

As it stands, De León’s bill offers a dollar-for-dollar state income tax credit for those who donate, which a legislative analysis of the bill called “the most generous tax credits ever allowed in California history.” The measure could allow donors to receive greater federal and state tax benefits than the amount of their contribution to the California Excellence Fund, the analysis said: A taxpayer at the highest income tax bracket who owed $10,000 in income taxes and instead donated that amount would receive $13,700 in benefits through the elimination of their state tax liability and addition of the federal charitable deduction.

Some opposed to the plan wonder why De León and other politicians who generally support legislation aimed at benefiting less well-off residents would try to develop a complicated system that offers perks for the wealthy.

“The scramble to restore the uncapped state and local tax deduction in high-tax states is in some ways a curious political exercise, as it largely involves elected officials who have championed progressive taxation contemplating intricate, almost Rube Goldberg-esque ways to make the federal tax code less progressive for wealthy taxpayers in their states,” wrote Jared Walczak, a senior policy analyst at the right-leaning Tax Foundation, in a critique of the legislation.

Beyond practical considerations, Walczak wrote, it’s unlikely the Internal Revenue Service would allow the effort because charitable deductions must have a public purpose under the law, and simply trying to sidestep federal tax liabilities wouldn’t qualify.

De León and legal experts working on the bill disagree, arguing that similar proposals have a long precedent in California and across the country. A De León-authored bill in 2014 provides charitable tax deductions to those who donate to a state fund that provides financial aid for low-income college students. In South Carolina, taxpayers can receive large reductions in their state taxes if they donate to a state-run nonprofit that funds private school scholarships for children with special needs.

“It’s a long-standing, super-familiar, very well-settled, deeply-embedded feature of the law that when you make a charitable contribution you oftentimes derive tax benefits from making that gift,” said Kirk Stark, a professor at the UCLA School of Law who is helping De León with the legislation.

Still, De León is planning to change his bill to make it less generous. Stark said that it’s less likely the Trump administration would challenge California’s policy if the credits it offered were less than dollar-for-dollar.

“We’re fine-tuning the percentage,” De León said.

De León also wants to work quickly so that Californians can begin making donations this year. His bill cleared a Senate committee on Wednesday, and he’s aiming for a full Senate vote by the end of the month. SB 227 would still need approval in the Assembly and Gov. Jerry Brown’s signature before it would become law.

Brown, during Wednesday’s briefing on his proposed state budget, seemed intrigued by the bill but wondered how it might work and if the IRS would torpedo it.

“I’m certainly open to it,” Brown said. “It looks interesting.”

Times Sacramento bureau chief John Myers contributed to this report.

liam.dillon@latimes.com

@dillonliam

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