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'Charitable Donations' Would Aim to Blunt New Tax Law's Impact on School Aid

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Do you consider your local government a charity? You may have a quick answer to that question—but charitable donations might be part of efforts by municipalities and others to counter what they see as harmful changes in the new federal tax code that could depress funding for schools. 

Rep. Josh Gottheimer, D-N.J., has floated a proposal to allow residents to make donations to charitable funds established by towns and cities. Those local governments would, in turn, provide tax credits homeowners could put towards their local tax bills. 

Why is Gottheimer pushing this? The GOP-backed tax overhaul, which President Donald Trump signed last month, places a cap of $10,000 on state and local tax deductions taxpayers can use to reduce their federal tax burden. This new cap could ultimately amount to a federal tax hike on some people, particularly in high-tax states like New Jersey. 

Gottheimer said in a statement that the "Tax Hike Bill," as he calls it, "was largely paid for on the backs of New Jersey taxpayers and, according to experts, will bring property values down by as much as 20 percent and send businesses and jobs to other states."

As we've highlighted previously, this could put new pressure on some state and local governments to reconsider their spending, potentially leading to less money for public schools. Various education advocacy groups opposed the tax bill for this reason, among others. Some state and local governments—particularly those in relatively high-tax blue states—are looking at various ways to reduce the potential impact of the tax overhaul on their residents, and this is just one possibility. Exactly what the appetite is in these places for state and local tax cuts remains to be seen. 

The new tax code still allows for people to deduct charitable donations from their income that's subject to federal tax, although the new federal tax code's increase in the standard deductions has some worried that fewer will itemize and deduct charitable donations from their taxes.  

These sorts of foundations that provide funding for schools already exist in some places, said Michael Griffith, a K-12 funding analyst at the Education Commission of the States. But setting one up and making it work can be very difficult, he noted. For one thing, they tend to get their money from and are often run by wealthier parents, which can create conflict between these organizations and districts. For another, convincing an entire community to donate and avoiding freeriders would be extremely hard, Griffith said. 

In addition, he noted, districts would have to juggle political and other calculations to make these foundations work, but at the end of the day, they'd mostly be preserving the funding they have instead of getting a big new windfall of cash. 

"This is not an overall cure to the problem," Griffith said. 

As a Wall Street Journal article about the proposal points out, there are potential legal problems at the federal level as well. That's because, in order for the homeowners to claim a charitable deduction, they aren't wouldn't be allowed to receive benefits in return. 

"I don't think the IRS is going to fall for that. It makes for great conversation, though," Scott Peterson, vice president at Avalara, a tax software company, told Accounting Today earlier this month.

Griffith said that there would have to be a general understanding in the community that both schools and taxpayers would be helped in some way by donations to these independent foundations, instead of a direct and formal quid-pro-quo for K-12 and residents. And getting it to work in larger communities, not just small towns, is another potential problem, Griffith pointed out. 

"How are you going to get everyone to contribute, and do it in a fair way and ensure that you're raising enough revenue?" Griffith said. "It's tricky but not impossible."

Photo: President Donald Trump displays the $1.5 trillion tax overhaul package he had just signed last month at the White House. (Evan Vucci/AP)


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