Steve's Blog

Combine a limitation on state and local taxes (SALT) under the new Federal tax bill with Democrats scrambling to score political points in an election year, stir in a dash of hypocrisy, and what do you get?

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You get H.B. 4237, which was introduced in the Illinois House on January 16^th.

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The tax bill that Congress recently passed and which was signed into law limits the amount of SALT which can be deducted on an individual’s personal income tax return to $10,000, whereas before, this deduction was unlimited. As a result, people living in high-tax states like Illinois will possibly see their Federal taxes go up as a result of the limitation. (I say “possibly” because of potential offsets due to an increased standard deduction and a broadening of the base income levels subject to generally lower rates. Consult your tax advisor.)

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I’m going to try to explain with a straight face why H.B. 4237 is going nowhere. It won’t be easy.

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The bill provides for the establishment of what’s being called the “Illinois Excellence Fund”:

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“The Illinois Excellence Fund is hereby created as a special fund in the State treasury. The Fund may accept contributions for exclusively public purposes, as specified under Section 170 of the Internal Revenue Code relating to charitable contributions and gifts. All moneys in the Fund shall be used for those public purposes, subject to appropriation by the General Assembly.

Any taxpayer who makes a contribution to the Illinois Excellence Fund is entitled to a credit against the taxes imposed under subsections (a) and (b) of Section 201 (of the Illinois Income Tax Act) in an amount equal to 100% of the contributions made by the taxpayer to the Fund during the taxable year.”

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If this sounds eerily familiar to you, it’s because this is the same type of program that was contained in the education funding bill that was passed by the General Assembly in August allowing for the establishment of private scholarships. If you run into any of H.B. 4237’s sponsors, ask them what they had to say about that.

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Without going too much into the weeds, this bill is going nowhere because it flies in the face of established Federal tax law.

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At its most basic, for a charitable contribution to be deductible, it must be made without expectation of financial return. Here, the “contribution” is made with nothing but the expectation of financial return, i.e.: a reduction in one’s Federal income tax. Also, if the contribution results in the assumption of a liability by the recipient in the form of providing a dollar-for-dollar tax credit, the deduction would also be disallowed. For those and many other reasons, at the state level, this bill is a total non-starter.

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But wait! There’s more! The bill goes on to amend the Counties Code to allow counties:

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“To establish a fund in the county treasury for the purpose of accepting contributions for exclusively public purposes, as specified under Section 170 of the Internal Revenue Code relating to charitable contributions and gifts. All moneys in the Fund shall be used for those public purposes. The county may provide for a credit against the taxpayer’s property tax liability in an amount equal to the amount of the contribution.” (emphasis mine)

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So what these geniuses are doing is telling counties that they can set up a fund to accept donations to be used for undefined charitable purposes in exchange for a reduction or elimination of your property tax bill, which will either raise taxes on everybody else or destroy the budgets of every school district and taxing body in the County. If you want to have some fun, show this to your local mayor or school board president and watch as their hair catches fire.

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The article from the Tax Foundation linked above says it best:

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“The scramble to restore the uncapped state and local tax deduction in high-tax states is…a curious political exercise, as it largely involves elected officials who have championed progressive taxation contemplating intricate, almost Rube Goldbergesque ways to make the federal tax code less progressive for wealthy taxpayers in their states.

If high-tax states are genuinely concerned that, absent federal subsidization of their tax rates, they might see outmigration or changes in taxpayer behavior, it would be more productive to revisit state tax rates than devising increasingly convoluted ways to enable high-income earners to reduce their federal tax liability.”

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Amen to that.