SALT in the Wounds: Stark Leads National Response to Federal Tax Law

20181008 KirkStarkTaxCharityIn December 2017, professor Kirk Stark was grading exams at a Starbucks in Sherman Oaks, California, when his mind turned to the Tax Cuts and Jobs Act, the federal tax bill about to become law.

The measure championed by Republicans in Congress gutted the so-called SALT deduction, a century-old provision of federal law that allows taxpayers to fully deduct their state and local taxes on their federal returns. The Barrall Family Professor of Tax Law and Policy at UCLA and a core faculty member of the Lowell Milken Institute for Business Law and Policy, Stark has written extensively on state and local tax policy, including the effects of federal law on subnational tax systems. In 2013 he and one of his students, Phil Blackman JD ’09, LL.M. ’12, published a paper on the interactive effect of state tax credits and the SALT deduction in encouraging taxpayers to make donations to various nonprofits and government funds. The paper arose from Stark’s work with California lawmakers, including then-state Assemblyman Kevin de León, in establishing a new state tax credit for donations that help low-income Californians attend college.

From his seat at Starbucks, Stark saw that the federal proposal to cap the SALT deduction at $10,000 represented a significant hit to people in California and other high-tax states. But he also spotted something Congress had missed: capping SALT deductions without also limiting deductions for charitable gifts would create a loophole where states provide tax credits for these gifts.                            

He and other tax scholars around the country flagged this issue and urged Congress to consider the consequences. “Unfortunately,” Stark notes, “the bill’s proponents not only ignored these warnings, but they pitched the SALT cap as an effort to target blue states. The partisan framing virtually guaranteed that these states would take steps to protect their programs.”

Stark reconnected with de León, who was by then California Senate president pro tem. He also organized a team of eight leading tax professors to write a paper showing how federal law allows states to use charitable tax credits for federally deductible gifts to avoid the effects of the new SALT cap. As a result, Stark became a go-to expert, fielding national press inquiries and advising lawmakers in several states.

Treasury Secretary Steve Mnuchin had one word for the states’ charitable tax credit proposals: “Ridiculous.” He vowed to fight them.

“The idea may be ridiculous,” Stark jokes, “but it is also firmly rooted in over 100 years of federal tax law.” He points out that both conservative and liberal states allow deductions for charitable donations, albeit for different purposes. “My view is that if South Carolina and Alabama can use this tax strategy to fund private school vouchers, then California and New York can and should use the same strategy to help fund public schools.”

In late August, the IRS released proposed regulations addressing the strategy, and a hearing is scheduled for November. Regardless of what emerges, Stark believes that litigation challenging the regulations is a virtual certainty.

Meanwhile, Stark hopes to use the conversation to challenge what he views as a counterproductive narrative: taxes are bad, and private philanthropy is good.

In a new paper, Stark is exploring what he calls “the cognate nature of taxation and charitable giving,” drawing on history, economics, and even neuroscience to show how the two forms of contributions are more alike than our laws admit. “The contributions we make to fund public goods, whether through taxes or gifts, are essentially doing the same thing,” he says, “and they’re equally deserving of our collective support and admiration.”