Tax experts have identified a potential workaround to the new limitation Republicans are placing on the state and local tax deduction, and say states could set up charities to fund state services that could receive federally deductible gifts.

The GOP tax overhaul passed by Congress this week sets a limit on the federal deduction for state and local taxes, or SALT. Under the bill, taxpayers can only deduct up to $10,000 in state income and property taxes from their federal taxable income.

But it appears that state and local governments could help residents circumvent that limit by setting up charities to fund programs. Here's how it would work:

Taxpayers suffering tax hikes due to the SALT limitation could donate to the charities and, in return, receive a dollar-for-dollar tax credit applicable to their state or local tax bill. Then, they could deduct up to 37 percent of that the “donation” from their federal taxable income through the charitable deduction, which was left uncapped in the tax overhaul. The deduction level would depend on their tax bracket.

In this way, states could create tax credits for donations to, for instance, their university systems by giving donors back 100 percent of the gift in the form of state income tax breaks. From the state’s perspective, it would still be getting revenue to fund services. But from the taxpayers' perspective, they would be able to write off a portion of that donation from their federal taxes, which they couldn't do if the university funding were collected in the form of a tax.

They'd have a big incentive to do so, because they'd effectively be getting 37 cents back for every dollar they donated to university system, in the form of federal charitable deductions, assuming they were in the top income bracket.

“It is a very significant flaw/hole in the new law,” said Kirk Stark, a professor of tax law at UCLA who has studied state charitable tax credits.

To the extent the maneuver worked, it would cut into the revenues the GOP plan is meant to raise to help pay for tax cuts. Republicans limited deductions for state and local taxes in order to help offset the broad tax cuts they approved.

Court cases and IRS guidance have made clear that states are allowed to set up such state charitable tax credits, said University of California, Davis law professor Darien Shanske. “It’s a proven legal technology,” he said.

Previously, contributions to such programs would have made sense for taxpayers subject to the Alternative Minimum Tax. For some people, the AMT disallows SALT deductions but not charitable contributions.

Under the Republican measure, many more taxpayers would benefit from making such gifts, because far more people would be up against the $10,000 SALT limit.

There are examples of such credits today. For example, Tax Analysts chief economist Martin Sullivan, who pointed out the potential workaround, cited a credit established by Maryland for donations to eligible charities.

Shanske said it would be novel for states to set up such programs at a scale large enough to seriously cut into the revenues raised by the cap on SALT, but said the logistics of doing so are well established. In fact, "it’s not clear that it is a loophole," he said, but rather simply a feature of tax law that could take on new significance in the years ahead.

Stark, though, suggested that states and cities are liable to set up such programs in large enough quantities to create a revenue problem. “‘Fixing this will require new legislation from Congress,” he said.