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Could tax scheme create higher ed windfall?

February 14, 2013|By Evan Halper
  • Sen. Kevin DeLeon (D-Los Angeles) is promoting a scheme through which he says California taxpayers could seize on a loophole that recently emerged in federal tax law to raise hundreds of millions of dollars for higher education.
Sen. Kevin DeLeon (D-Los Angeles) is promoting a scheme through which he… (Andrew Harrer )

California lawmakers have long complained about being shortchanged by Washington, D.C.: California taxpayers put a lot more into the U.S. Treasury than the state gets back in federal spending.

One politician is proposing an unorthodox approach to grabbing some of those dollars back.

Sen. Kevin DeLeon (D-Los Angeles) is promoting a scheme through which he says taxpayers could seize on a loophole that recently emerged in federal tax law to raise hundreds of millions of dollars for higher education.

Like all tax schemes, it is complicated. And this one is somewhat ironic, coming from a lawmaker who has spent a good part of his career crusading against tax-avoidance schemes.

But if DeLeon has it right, his proposal could in just one year raise $500 million for grants for the state’s low-income college students -- without costing the state a dime.

The plan starts with the state asking Californians to make charitable contributions into the Cal Grants financial aid program. Taxpayers will naturally be suspicious.  Why should they give the money they set aside for charity to a government program?

Because they will ultimately get back roughly 75 cents of every dollar they kick in.

DeLeon says they have a new wrinkle in federal tax law to thank. It allows taxpayers to claim the same tax deduction on a gift to government as a gift to charity. It is worth some 15 or 20 cents.

Once they claim that deduction, under DeLeon's plan, the state would kick back another 60 cents for every dollar contributed in the form of a California tax break.

In the end, the state is left with about 40 cents on each dollar contributed.  The size of Cal Grants available for 171,000 low-income students would jump from less than $1,500 to $3,000.

Too clever by half? Some of DeLeon’s colleagues seem to think so. He pitched the idea last year and his bill died in committee.

But he comes back this year armed with a new white paper written by a law professor at UCLA and the director of development at the law school at Penn State, who say that while such proposals may “sound too good to be true,” they are “legally sound.” They use DeLeon’s bill as a case study of how California could grab hundreds of millions of dollars in new revenue from the federal government.  

“When folks first hear about it, they don’t get it,” said DeLeon, who will unveil his latest bill language in a Capitol news conference Thursday morning. “When it sinks in, they find it to be ‘interesting.’ ” But still confusing, he admits.

“We have been subsidizing other states through an arcane, overly complex tax system set up against California,” he said. “I think it is fair to leverage this part of it to help our students.” 

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Twitter: @evanhalper

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