57-18 Exhibit - Urging State of New Jersey to Implement Charitable Trust in Lieu of Local Taxes Plan.pdf

FEDERAL  TAX  TREATMENT  OF  STATE  CHARITABLE  TAX  CREDITS     First,   the   rule   reduces   arbitrariness   and   significant   computational   and   administrative   difficulties.   The   most   likely   alternative   rule   would   limit   the   deduction   by   the   amount   of   state   tax   benefit.   Under   that   rule,   the   amount   of   the   federal   tax   charitable   deduction   would   vary   from   state   to   state,   and   vary   from   taxpayer   to   taxpayer   within   each   state.     This   would   be   arbitrary   in   itself,   and   raise   practical   difficulties   for   taxpayers   and   tax   agencies.   A   taxpayer  would  learn  the  amount  of  her  federal  deduction  only  by  doing  simulations  at  the   time   of   filing;   first   simulating   her   state   tax   liability   with   the   contribution,   and   then   without   the   contribution.   She   would   not   know   the   amount   of   her   deduction   when   making   the   contribution.   The   simulations   would   be   burdensome   and   confusing   to   taxpayers,   and   the   fact   that   the   amount   of   deduction   could   not   be   known   at   the   time   of   the   contribution   would  create  uncertainty  that  would  likely  limit  contributions.  This  alternative  rule  would   also   be   burdensome   to   the   IRS,   since   it   could   challenge   a   deduction   only   by   making   similar   simulations   of   the   taxpayer's   state   tax   liability.   These   difficulties   would   be   magnified   if   states   adopted   the   federal   approach,   so   that   state   benefits   were   limited   by   the   federal   benefits,  just  as  federal  benefits  were  limited  by  state  benefits.  At  that  point,  determining   the  amount  of  federal  or  state  benefit  would  require  the  use  of  an  algebraic  formula  that   took  the

its.  At  that  point,  determining   the  amount  of  federal  or  state  benefit  would  require  the  use  of  an  algebraic  formula  that   took  the  limitation  of  both  benefits  into  account.  Such  a  calculation  would  be  beyond  the   comprehension  of  all  but  a  few  taxpayers  or  tax  preparers.  Variants  of  this  alternative  rule  -­‐   such   as   denying   a   deduction   when   the   state   tax   benefit   reached   a   certain   point   -­‐   would   require  similarly  confusing  calculations,  and  have  the  further  disadvantage  of  arbitrariness,   creating  a  “cliff  effect”  for  taxpayers  who  fall  just  short  of  the  acceptable  benefit.     Second,   the   Full   Deduction   Rule   is   consistent   with   the   fundamental   principles   that   underlie  the  concept  of  taxable  income.    The  federal  tax  laws  have  historically  recognized   the   entirety   of   certain   state   taxes   as   a   deduction.   However,   federal   law   has   never   attempted   to   go   beyond   those   easily   determined   figures   by   inquiring   as   to   whether   the   internal  calculations  of  state  tax  liability  generates  federal  taxable  income.  There  is  a  good   reason   for   this.   It   is   impossible   to   know   whether   the   combination   of   rates,   deductions,   credits  and  state  services  a  taxpayer  receives  makes  her  better  or  worse  off  in  a  way  that   can   be   recognized   by   a   concept   such   as   federal   taxable   income.   Theories   on   which   to   base   taxable  income,  such  as  the  Haig-­‐Simons  definition  of  income,  have  never  been  understood   to   incorporate   this   determination.   The   numerous   judicial   and   administrative   authorities   cited   above   likewise   reflect   a   judgment   not   to   regard   the   various   credits   and

  numerous   judicial   and   administrative   authorities   cited   above   likewise   reflect   a   judgment   not   to   regard   the   various   credits   and   deductions   allowed  in  computing  state  tax  liability  as  producing  taxable  income.     Finally,   the   Full   Deduction   Rule   is   supported   by   considerations   of   federalism.   State   credits  in  this  context  are  used  to  stimulate  contributions  that  impact  state  programs  and   state  residents.    For  example,  the  Colorado  conservation  credits  described  above  put  land   in   the   public   trust   for   the   benefit   of   residents   (and   visitors).   Contribution-­‐related   credits   enacted  at  the  state  level  serve  a  variety  goals,  affecting  not  only  the  taxpayers  who  qualify   for   the   credits,   but   the   wider   public   as   well.   The   Full   Deduction   Rule   is   properly   neutral   toward  these  state  initiatives.     19