Dems push SALT deduction workaround rule repeal

Tax Hot Topics newsletter Democrats in Congress are seeking use the Congressional Review Act (CRA) to force a vote on invalidating recent IRS regulations that shut down state charitable programs designed to circumvent the limitation on the state and local tax (SALT) deduction.

The Tax Cuts and Jobs Act (TCJA) capped the itemized deduction for state and local taxes at $10,000. In response, several states passed laws establishing charitable funds for state services that taxpayers can contribute to in exchange for state tax credits. The IRS issued final rules that generally require taxpayers to reduce their charitable deduction by the amount of state tax and local credits received in return, essentially putting an end to the workarounds. The rules became effective on Aug. 12.

Democrats and even some Republicans have been critical of the $10,000 cap, citing the disparate impact on taxpayers in high-tax states, and there are numerous proposals to raise it or repeal it outright.

Under the CRA, Congress can expedite review of federal regulations and overrule them by joint resolution within 60 legislative days of publication in the Federal Register. The process is particularly efficient in the Senate, where only 30 senators are needed to force the joint resolution out of committee. The measure is also filibuster proof and floor debate is limited to 10 hours with no amendments. A simple majority is required for passage in both the Senate and House of Representatives.

Twelve Senate Democrats have already signed onto the joint resolution (S.J. Res. 50) that would overturn the SALT deduction charitable workaround rules. The House version (H.J. Res. 72) has 51 co-sponsors. There should be enough support among Democrats for the House measure to pass without any Republican votes, but Democrats in the Senate would need at least four Republicans to join them. Senate Republicans are expected to whip hard to preserve the rules, but some within their conference may find it difficult to vote to uphold the SALT deduction cap in a standalone measure even if they supported it as part of the TCJA. The resolution is not subject to a veto.

The final rules were published to the Federal Register on June 13, placing the CRA deadline to overrule them in early to mid-December. The exact date is to be determined by the House and Senate Parliamentarians.

The impact of invalidating the regulations is not completely clear. If the joint resolution passes, the IRS will be permanently barred from issuing a new, “substantially similar” rule. However, even absent the explicit new rules on the state programs, it is unclear whether the IRS would still be able to challenge charitable deductions under the general preexisting rules that preclude a deduction if consideration is received in return.

Dustin Stamper
Managing Director
Washington National Tax Office
T +1 202 861 4144

Omair Taher
Senior Associate
Washington National Tax Office
T +1 202 861 4143

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