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Why Can't New Jersey Residents Deduct Donations They Make to Charity?

Federal write-off for charitable gifts would be extended to those filing state income-tax returns

tom kean jr
Credit: Martin Griff
Senate Minority Leader Tom Kean Jr.

Writing a check to a charity, arts group or some other nonprofit organization can help your bottom line by lowering your overall taxable income on your federal tax return. But those same benefits don’t apply to New Jersey income taxes because the state doesn’t offer a deduction for charitable giving.

Two Republican lawmakers want to change that for the 2016 tax year, proposing legislation earlier this month that would allow charitable contributions to be deducted from state income taxes.

The legislation sponsored by Sen. Tom Kean Jr. (R-Union) and Sen. Steven Oroho (R-Sussex) has been proposed at a time when taxes are on the minds of millions of New Jersey residents in the process of submitting their federal and state income tax returns in advance of this year’s April 18 deadline.

But it also comes as lawmakers are reviewing Gov. Chris Christie’s budget for the next state fiscal year, and as legislators have proposed a series of changes to New Jersey tax policies in a bid to make the state more competitive with its neighbors. Those include legislation that would phase out New Jersey’s estate tax and increase state income-tax exemptions on retirement income like pensions, IRAs and 401(k)s.

Many Democrats in Trenton hope that by working with their Republican counterparts on bills that would change state tax policies they will be able to win enough votes for an increase of New Jersey’s gas tax, which they see as the best way to renew a state Transportation Trust Fund that is on course to run out of money at the end of June.

No charitable deductions

New Jersey’s income tax rules allow only a limited number of deductions, including certain medical expenses and property taxes. Charitable contributions generally do not qualify as one of those deductions allowed under New Jersey’s rules.

Many states, including neighboring New York, allow for the deduction of charitable contributions, though limits vary by state – and some have no income tax at all.

But generally that means, if all else is equal, the income of a tax filer in New York with the same salary as someone in New Jersey would be lower for income-tax purposes because their charitable contributions can be deducted.

Kean Jr., who has been trying for years to advance legislation that would allow deductions for charitable donations in New Jersey, said it’s not widely known here that charitable contributions can’t be deducted from state income taxes.

The latest version of the bill would permit the deduction only when the donation is made to a nonprofit that’s based in New Jersey and provides its services here, he said.

“It would basically be neighbors helping neighbors,” Kean Jr. said. “It just makes common sense.”

Oroho, a member of the Senate Budget and Appropriations Committee, said the goal is also to provide an incentive for people to give to safety net groups and other charitable organizations that he frequently hears from during budget committee hearings held around this time of year. When those organizations get more private donations, they can provide more services, which in turn eases the burden on programs funded out of the state budget, he said.

The two senators toured a Sussex County-based charitable organization called Project Self-Sufficiency yesterday to bring more attention to their legislation and the role that such organizations play in New Jersey. Based in Newton, Project Self-Sufficiency receives both private contributions and public funding to support a range of services for low-income individuals in Sussex County, including education, child care, and food assistance.

“Most nonprofit organizations rely on the generosity of the communities in which they operate,” said Deborah Berry-Toon, the group’s executive director. “An increase in funding would allow Project Self-Sufficiency and other charitable organizations to expand programs and services to assist the most vulnerable members of New Jersey’s communities.”

Less income for state?

But right now, the income tax is the state budget’s largest single source of revenue, and allowing state deductions for charitable giving would mean taking in less revenue, which could mean cuts or a tax increase somewhere else.

Christie is projecting $14.4 billion in revenue from income tax collections to support his $34.8 billion spending plan for the fiscal year that begins July 1.

Nonpartisan legislative analysts who reviewed an earlier version of the state income-tax deduction bill projected the change would have cost the state roughly $300 million in revenue. But that analysis was conducted before the lawmakers proposed restricting the contributions to New Jersey-based organizations.

Both senators also argued that the change would also go a long way toward making New Jersey more competitive with other states trying to lure people – particularly those with high net incomes – to relocate with less-aggressive tax policies, or no state income tax at all.

Liberal groups, meanwhile, have disputed the notion that state tax policies are influencing such decisions, and they’ve argued against the charitable deductions since they tend to disproportionately benefit the wealthy.

But Oroho was among those who raised the issue of state tax policies amid the news last week that New Jersey’s wealthiest resident, hedge fund manager David Tepper, has moved to Florida, where there is no income tax. Not only do high-income individuals pay taxes where they live, but they also tend to make charitable contributions close to home as well, Oroho said yesterday.

“People love to give. It puts a smile on their face. But taxes? They hate them,” he said.

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