Washington — The Treasury Department has moved to block attempts by several Democratic-led states to bypass the federal cap on state and local tax deductions, a key provision of the 2017 tax overhaul championed by former President Donald Trump. The decision marks a major setback for high-tax states that sought creative ways to shield residents from higher federal tax bills.
The dispute centers on the $10,000 cap on state and local tax, or SALT, deductions. The limit, introduced as part of the Tax Cuts and Jobs Act, disproportionately affected taxpayers in states such as New York, New Jersey, Connecticut, and California, where property taxes and local levies are high. In response, those states created charitable funds that allowed residents to make “donations” in exchange for state tax credits, effectively restoring much of the deduction.
Federal officials ruled that these programs violate the intent of federal tax law. The new Treasury regulations clarify that taxpayers cannot claim full federal charitable deductions for contributions that result in significant state tax benefits. The move effectively neutralizes the workaround and reinforces the deduction cap.
Republican lawmakers who helped craft the tax law praised the ruling, arguing that it preserves fairness by preventing wealthy residents of high-tax states from receiving special treatment. Democratic officials, however, called the decision politically motivated and accused the administration of targeting blue states for punitive reasons.
State leaders are now weighing potential legal challenges. New York Governor Andrew Cuomo said the ruling “weaponizes the tax code” and penalizes citizens for living in states that invest heavily in education and infrastructure. Treasury officials countered that the change simply closes a loophole that undermined the integrity of federal tax policy.
The crackdown deepens a longstanding political and fiscal divide between Washington and the states most affected by the deduction limit. While Congress may revisit the SALT cap in future tax debates, for now, residents in high-tax regions are likely to face steeper federal bills — and fewer options for relief.
