Rhode Island Lawmakers Include SALT Cap Workaround in Budget

Rhode Island lawmakers have included in their final version of the budget a plan to allow taxpayers to circumvent the federal cap on the state and local tax deduction.

The $9.9 billion fiscal year 2020 budget bill (H. 5151A), approved June 27 by the state legislature, includes a workaround for owners of pass-through entities whose state and local taxes exceed the $10,000 SALT deduction cap in the 2017 federal tax law. The bill—which doesn’t directly conflict with the latest IRS restrictions to SALT cap workarounds—now heads to the desk of Gov. Gina Raimondo (D).

“This is a way to help Rhode Island small businesses at no cost to the state. Our small businesses are the backbone of our economy, and face enough challenges without being saddled with new tax burdens by President Trump’s tax plan,” House Majority Leader K. Joseph Shekarchi (D) said in a statement.

33% Use SALT Deduction

In Rhode Island, 33% of filers use the SALT deduction, and on average claimed $12,434 in 2015, according to research by Pew Charitable Trusts. The organization lists Rhode Island as one of 19 states where the average SALT deduction exceeds the new $10,000 cap.

Rhode Island’s proposed workaround would set a 5.99% levy on pass-through entities, which report their income on owners’ personal returns. Pass-through owners would then get a state credit equal to 100% of the owner’s share of tax paid by the business. The strategy effectively lets pass-through owners take bigger federal write-offs to help offset their previously unlimited SALT deductions. The proposal, which would take effect for the 2019 tax year, is expected to be revenue-neutral for the state.

Connecticut and Oklahoma also have laws that create a tax on pass-through entities with a corresponding credit.

But their strategies may not work because the IRS isn’t done looking at state workarounds, agency Chief Counsel Michael Desmond said.

Final regulations (T.D. 9864) issued earlier this month only addressed charitable fund workarounds offered in states like New York, New Jersey, and Connecticut. “No decision” has been made on how the IRS will respond to the pass-through workarounds, Desmond said June 27 at a Bloomberg Tax Leadership Forum in New York.

Budget Taxes Streaming Services

In addition to the workaround, the Rhode Island budget bill includes Raimondo’s proposal to expand the state’s 7% sales tax to include digital downloads and streaming services like Netflix Inc. Raimondo also proposed legalizing and taxing recreational marijuana, increasing the state’s hotel tax, and expanding the sales tax base to include certain services, but these proposals were jettisoned by lawmakers.

—With assistance from Siri Bulusu.