On Jan. 5, Rep. Josh Gottheimer, D-N.J., proposed a plan that would allow homeowners to make up for lost property tax breaks by taking a charitable deduction.
Towns and cities would establish charitable funds to pay for public services, including schools and law enforcement. Homeowners could make contributions to these funds. The municipality would provide homeowners a tax credit to offset that donation. Then on a federal return, the homeowner can take a charitable deduction for the contribution.
Homeowners who already pay their property taxes monthly, wrapped in with their mortgage payment, would have to work with their lenders to ensure that there would be less or no property tax paid.
Three towns in New Jersey — Fair Lawn, Paramus and Park Ridge — are already designing plans based on this concept.
In response to Mnuchin’s comments, Gottheimer said there’s already a precedent for this idea. He pointed to an IRS memo that allowed contributions to a state tax credit program to be considered charitable contributions.
Gottheimer also said there are existing plans in a number of states that give taxpayers a credit for contributing to public funds that give money to local causes.
Challenges ahead
The IRS told CNBC that it’s not issuing any statements on these proposals as of now — yet the ideas are receiving a fair share of criticism from elsewhere.
“It’s the kind of thing that emerges in an ivory tower with not much thought about the practicality,” said E.J. McMahon, a conservative economist and founder of the Empire Center for Public Policy.
California Senate leader de Leon said the California Excellence Fund was modeled after a bill passed in 2014 that permits Californians to donate to a state general fund to support students’ higher education. Those donors receive a tax credit for their federal returns.
Similar systems also already exist in Republican-leaning states like Alabama and Arizona, he said.
“It’s very clear that we already have many states using this model,” de Leon said. “If they change this all of a sudden — after this egregious tax policy was passed by the Republicans — it would smack of utter politics.”
Still, critics say that what’s being proposed is different from those existing programs.
“These [existing program] contributions produced an actual charitable benefit, whereas the proposals involve a pure tax swap,” said Jared Walczak, senior policy analyst at the Tax Foundation. “The IRS requires that charitable contributions have genuine charitable intent and a charitable outcome.”
McMahon pointed out that any value you receive from a charitable donation is not deductible. He provided an example: If a person at a silent auction bought a vacation that’s worth $2,000, but paid $4,000 for it, he could only deduct $2,000 — because the other half was not charity, but rather a benefit he reaped.
The idea of a dollar-for-dollar tax credit, then, would fly in the face of this policy, he said.
Galle, however, said tax benefits are not considered income, or value in the traditional sense.
“The legal bar for finding that a state tax benefit creates federal income is very high,” he said.
New Jersey’s proposed program and others like it may pass the charitable intent smell test depending on how they’re structured, advocates said.
“Let’s say you could direct some of the money you paid — if you could say that it went to cops, to schools — then it’s not really a tax, it’s a charitable contribution,” said Stanford Law School’s Bankman. “With current taxes, none of the money can be directed. But here it can be.”
Mujica said he is not worried about challenges from the federal government.
“We’re going to draft legislation that can withstand any legal tests,” he said.
