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Could Democrats Cut a Deal on State Tax Deduction for Charitable Contributions?

They might, as part of a swap on gas-tax hike; meanwhile, Republicans claim charitable deduction would benefit nonprofits -- as well as the wealthy

diane allen and tom kean jr
Sens. Diane Allen (R-Burlington) and Tom Kean Jr. (R-Union) speak yesterday at the Alice Paul Institute in Mount Laurel in support of a bill that would establish a new state income-tax deduction category for charitable contributions.

Republican lawmakers have tried in vain for roughly a decade to convince Democrats who control the state Legislature to create a new tax break for New Jersey residents who make charitable contributions.

But this year Democrats in the Senate are taking a second look at the issue, offering new hope to the GOP sponsors who want to see New Jersey added to the list of states that permit charitable donations to be deducted from state income taxes just as they can deduct contributions from federal taxes.

Whether the tax break can make it out of the Legislature this year is still unclear. It will depend largely on how talks progress over the next few weeks on a series of proposed tax-policy changes, including an increase of the state gas tax that Democrats are seeking to bring in more money for New Jersey’s going-broke Transportation Trust Fund.

And while some Democrats and liberal groups are opposing the proposed tax break for charitable contributions, calling it an unnecessary giveaway that would largely benefit the rich, others are making the case that allowing the tax deduction will encourage more -- and more generous -- donations to New Jersey’s many charities and nonprofit organizations.

Yesterday two Republican lawmakers who want to see the state tax break enacted this year visited the birthplace of Alice Paul, the New Jersey native who fought tirelessly for women’s voting rights a century ago, to demonstrate how the policy change would benefit the state’s nonprofit community.

Wealthy residents may take advantage of the tax break if it becomes law, they said, but that would also mean much more funding would go to places like the Alice Paul Institute, the Mount Laurel-based nonprofit that carries on Paul’s legacy by promoting equal rights and administering leadership-development programs for middle- and high-school girls.

“I don’t think it’s just the wealthy people who win,” said Sen. Diane Allen (R-Burlington) during a news conference held at Paulsdale, the ancestral home of the famous suffragist. Paul, who was born in 1885, will soon appear along with other suffragists like Susan B. Anthony on the new $10 bill .

“It’s everybody who wins when we can support our charities,” Allen said.

A bill seeking to establish a state income-tax deduction for charitable contributions has been introduced in the Legislature every session going back to 2007. But this year’s version has a new wrinkle, offering to limit the tax break to only those who make charitable contributions to nonprofit organizations that are based in New Jersey.

The goal is to provide a much-needed boost to state nonprofits while also easing the burden on state-funded safety-net programs, said Senate Minority Leader Tom Kean Jr., who is the primary sponsor of the legislation.

“Every charitable organization, every nonprofit, time and again has said the need is growing,” said Kean Jr. (R-Union).

More than a dozen states, including New York, already offer the deduction on state income taxes, just as the federal government does. Kean Jr.’s legislation would include the same limit on deductions that’s allowed by the federal government, which is generally 50 percent of adjusted gross income.

His bill also defines a charity as a nonprofit group organized under the federal Internal Revenue Service’s 501(c)3 rules. And if the bill is enacted this year, taxpayers could start filing for the deductions beginning with the 2017 tax year.

Though Democratic legislative leaders have largely ignored the push for a state income-tax deduction category for charitable contributions over the past decade, they’ve taken a new interest in Kean Jr.’s legislation this year as they seek to entice Republican lawmakers to consider hiking the gas tax to shore up the Transportation Trust Fund. Right now, the trust fund, which pays for road, bridge and, rail-network improvements throughout the state, will run out of money by August unless lawmakers can come up with a new source of revenue.

Last week, Senate Budget and Appropriations Committee Chairman Paul Sarlo (D-Bergen) laid out the framework of a possible bipartisan deal that would involve Republicans providing enough votes for a gas-tax hike in exchange for Democrats backing a series of tax cuts favored by Republicans. They would include phasing out New Jersey’s estate tax, lifting tax exemptions on retirement income like pensions and 401(k) plans, and establishing the tax break for charitable contributions. Democratic leaders in the Senate have also said they’d like to get enough bipartisan support for a plan that could withstand a veto by Gov. Chris Christie, a second-term Republican who’s said he’s “unlikely” to support a gas-tax hike.

Taken together, the total value of the proposed tax cuts is close to $1 billion, a number Republicans would probably be able to sell to their base as a net win even if they end up voting for a gas-tax hike that raises at least several hundred million dollars, and maybe much more.

According to legislative analysts, phasing out the estate tax over several years would amount to a $550 million tax cut; lifting the retirement-income exemptions would add another $125 million; and allowing charitable contributions to be deducted from state income taxes could total another $300 million.

Republicans could also make the case that while up to a third of the gas-tax revenue in New Jersey comes from out-of-state motorists, the three proposed tax cuts would fully benefit New Jersey residents who pay taxes. And at 14.5-cents, New Jersey’s gas tax right now is the second-lowest in the country.

Still, Kean Jr. gave no indication yesterday that a bipartisan deal is close to being struck.

Democrats, meanwhile, have also faced some pushback, including from members of their own party and liberal groups who have been raising concerns about the impact the proposed tax cuts would have on the broader state budget. New Jersey already doesn’t have enough money coming in to fully fund its public-employee pension system, the state’s school-aid law, or other important safety net programs, they warn.

And since the revenue that would be raised from an increased gas tax would go directly into the Transportation Trust Fund, an off-budget account dedicated to paying for transportation-infrastructure projects, the state would need to experience about $1 billion in economic growth to offset the cuts without having to reduce spending in key areas. Democrats like Sarlo who support the tradeoff scenario believe that revenue could eventually be made up with normal growth in tax collections, along with the additional dollars that would be generated from a renewed trust fund that spends $2 billion annually, and possibly, new casinos opening in North Jersey.

Jon Whiten, deputy director of New Jersey Policy Perspective, a liberal think tank based in Trenton, cited revenue concerns yesterday in explaining why his organization opposes allowing for the deduction of charitable contributions from state income taxes. He also said much of the benefit of the tax break would be enjoyed only by the wealthiest taxpayers.

“New Jersey already can't afford to maintain the critical services used each and every day by the hundreds of thousands of residents who have fallen on hard times,” he said. “Taking an additional $300 million a year away by implementing a tax break that disproportionately benefits the top half of New Jersey families would only make this situation worse.”

But Allen, the Burlington County lawmaker and a supporter of the Alice Paul Institute, said that’s the wrong way to look at the issue.

“If we do this, it’s a win-win, for the state, for the charities, and for everybody who benefits,” she said.

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