State Responses to Federal Tax Reform: Charitable Tax Credits

49 Pages Posted: 11 Jan 2018 Last revised: 2 Jul 2018

See all articles by Joseph Bankman

Joseph Bankman

Stanford Law School

David Gamage

University of Missouri School of Law

Jacob Goldin

Stanford Law School

Daniel J. Hemel

New York University School of Law

Darien Shanske

University of California, Davis - School of Law

Kirk J. Stark

University of California, Los Angeles (UCLA) - School of Law

Dennis J. Ventry

University of California, Davis - School of Law

Manoj Viswanathan

UC Law, San Francisco

Date Written: April 30, 2018

Abstract

This paper summarizes the current federal income tax treatment of charitable contributions where the gift entitles the donor to a state tax credit. Such credits are very common and are used by the states to encourage private donations to a wide range of activities, including natural resource preservation through conservation easements, private school tuition scholarship programs, financial aid for college-bound children from low-income households, shelters for victims of domestic violence, and numerous other state-supported programs. Under these programs, taxpayers receive tax credits for donations to governments, government-created funds, and nonprofits.

A central federal income tax question raised by these donations is whether the donor must reduce the amount of the charitable contribution deduction claimed on her federal income tax return by the value of state tax benefits generated by the gift. Under current law, expressed through both court opinions and rulings from the Internal Revenue Service, the amount of the donor’s charitable contribution deduction is not reduced by the value of state tax benefits. The effect of this "Full Deduction Rule" is that a taxpayer can reduce her state tax liability by making a charitable contribution that is deductible on her federal income tax return.

In a tax system where both charitable contributions and state/local taxes are deductible, the ability to reduce state tax liabilities via charitable contributions confers no particular federal tax advantage. However, in a tax system where charitable contributions are deductible but state/local taxes are not, it may be possible for states to provide their residents a means of preserving the effects of a state/local tax deduction, at least in part, by granting a charitable tax credit for federally deductible gifts, including gifts to the state or one of its political subdivisions. In light of recent federal legislation further limiting the deductibility of state and local taxes, states may expand their use of charitable tax credits in this manner, focusing new attention on the legal underpinnings of the Full Deduction Rule.

The Full Deduction Rule has been applied to credits that completely offset the pre-tax cost of the contribution. In most cases, however, the state credits offset less than 100% of the cost. We believe that, at least in this latter and more typical set of cases, the Full Deduction Rule represents a correct and long-standing trans-substantive principle of federal tax law. According to judicial and administrative pronouncements issued over several decades, nonrefundable state tax credits are treated as a reduction or potential reduction of the credit recipient’s state tax liability rather than as a receipt of money, property, contribution to capital, or other item of gross income. The Full Deduction Rule is also supported by a host of policy considerations, including federal respect for state initiatives and allocation of tax liabilities, and near-insuperable administrative burdens posed by alternative rules.

It is possible to devise alternatives to the Full Deduction Rule that would require donors to reduce the amount of their charitable contribution deductions by some or all of the federal, state, or local tax benefits generated by making a gift. Whether those alternatives could be accomplished administratively or would require legislation depends on the details of any such proposal. We believe that Congress is best situated to balance the many competing interests that changes to current law would necessarily implicate. We also caution Congress that a legislative override of the Full Deduction Rule would raise significant administrability concerns and would implicate important federalism values. Congress should tread carefully if it seeks to alter the Full Deduction Rule by statute.

Suggested Citation

Bankman, Joseph and Gamage, David and Goldin, Jacob and Hemel, Daniel J. and Shanske, Darien and Stark, Kirk J. and Ventry, Dennis J. and Viswanathan, Manoj, State Responses to Federal Tax Reform: Charitable Tax Credits (April 30, 2018). State Tax Notes, Vol. 159, No. 5, 2018, UCLA School of Law, Law-Econ Research Paper No. 18-02, UC Hastings Research Paper No. 264, Available at SSRN: https://ssrn.com/abstract=3098291 or http://dx.doi.org/10.2139/ssrn.3098291

Joseph Bankman

Stanford Law School ( email )

559 Nathan Abbott Way
Stanford, CA 94305-8610
United States
650-725-3825 (Phone)
650-725-7663 (Fax)

David Gamage

University of Missouri School of Law ( email )

Missouri Avenue & Conley Avenue
Columbia, MO MO 65211
United States

HOME PAGE: http://law.missouri.edu/person/david-gamage/

Jacob Goldin

Stanford Law School ( email )

559 Nathan Abbott Way
Stanford, CA 94305-8610
United States

Daniel J. Hemel

New York University School of Law ( email )

Darien Shanske

University of California, Davis - School of Law ( email )

400 Mrak Hall Dr
Davis, CA CA 95616-5201

Kirk J. Stark (Contact Author)

University of California, Los Angeles (UCLA) - School of Law ( email )

385 Charles E. Young Dr. East
Room 1242
Los Angeles, CA 90095-1476
United States
310-825-7470 (Phone)

Dennis J. Ventry

University of California, Davis - School of Law ( email )

UC Davis School of Law
400 Mrak Hall Drive
Davis, CA 95616-5201
United States
530-752-4566 (Phone)

Manoj Viswanathan

UC Law, San Francisco ( email )

200 McAllister Street
San Francisco, CA 94102
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
3,462
Abstract Views
21,298
Rank
6,244
PlumX Metrics