Huh? One of us did not read the article very well, though to be honest it might be me.
Charitable Gifts
One tactic: Allow residents to make charitable gifts to the state instead of paying income tax.
That would involve legislators encouraging residents to donate to, say, New Jersey (insert quip here), instead of paying income taxes. The self-interested philanthropists who took up the state on the offer would receive a state income-tax credit for the full amount of their gift, which would qualify for a federal deduction.
Wealthy taxpayers already use a similar ploy in 18 states that offer at least partial tax credits in return for donations to nonprofits that grant tuition vouchers to private and religious schools. It especially appeals to affluent filers who pay the alternative minimum tax, which doesn’t allow them to claim deductions for state and local levies.
Similar Strategy
In a memo released in 2011, the Internal Revenue Service gave its blessing for taxpayers to claim federal deductions on those gifts. The combination of a 100 percent state-tax credit and a federal deduction actually makes the gifts profitable for some donors, said Carl Davis, research director for the Institute on Taxation and Economic Policy.
“It’s really just a mechanism in state law that lets people launder state income-tax payments and convert them into charitable contributions,” Davis said.
Alas, it would involve a loophole that’s easy to close, he said.
“Under the current rules, it’s workable,’’ he said. “But I don’t see Congress or the IRS letting a state get away with it very long.”
The charitable-gift gambit isn’t the only potential loophole. States could quit relying on income tax, paid by individuals, and switch to payroll taxes, levied on employers, according to a Dec. 7 report, “The Games People Play,” by a group of tax experts that includes Kamin and Shanske.
If employers pay the payroll tax and reduce employees’ salaries by the same amount, workers wouldn’t have to deduct anything and would wind up being paid the same amount. That would allow states to collect the same revenue while preserving individuals’ deductions on federal returns.