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Can the TTF Rescue Plan Ensure Tax Fairness Through Tax Cuts?

A complex calculus of tax cuts and phase outs are part of the economic infrastructure of the Sarlo-Oroho plan

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New Jersey lawmakers are being asked to consider implementing a series of tax cuts this month as part of a broader bipartisan proposal to renew New Jersey’s Transportation Trust Fund that also includes a plan to more than double the state’s gas tax.

The combining of the tax cuts with the proposed gas-take hike -- which would take New Jersey’s gas tax from 14.5-cents per-gallon to 37.5 cents -- is aimed at providing overall tax fairness for a state that by many measurements has one of the heaviest tax burdens in the country.

The fuel tax-policy changes would generate more than $1.3 billion in annual revenue for the Transportation Trust Fund, which pays for road, bridge, and rail-network improvements throughout the state. And because the trust fund is already facing significant debt, there would be no money available for new projects once the fund’s current five-year finance plan expires on June 30 under the current gas-tax rates.

The sweeping plan released by Sens. Paul Sarlo (D-Bergen) and Steve Oroho (R-Sussex) on Friday calls for annual state transportation spending to increase by roughly $400 million per year over the current $8 billion finance plan, resulting in a 10-year, $20 billion proposal.

But it also involves as many as five different tax cuts, and others could be added as lawmakers look to craft a final deal that can win enough support to get it to Gov. Chris Christie – and possibly sustain a gubernatorial veto if he ultimately decides to oppose it.

The blend of proposed cuts that makes it into any final deal is crucial because each tax-policy change will have an impact on the annual budget’s general fund. And though the Sarlo-Oroho plan hopes to free up some sales tax revenue that’s been going in recent years to the Transportation Trust Fund, their proposed tax cuts won’t be offset by any new revenue that will be generated by a gas-tax increase. That’s because those dollars will be constitutionally dedicated to the off-budget Transportation Trust Fund.

Here’s a list of the proposed tax cuts that right now are in the bipartisan TTF plan, and at least one other cut that could be added as negotiations among lawmakers progress this month:

Estate tax phaseout – Christie earlier this year called on lawmakers to get rid of the tax the state levies on estates larger than $675,000. A bill that was passed with bipartisan support weeks later by the Senate Budget and Appropriations Committee would phase out the estate tax over five years. But the Sarlo-Oroho TTF plan now calls for the estate tax to be eliminated even sooner, by the end of 2019. The nonpartisan Office of Legislative has estimated a full phaseout of the tax would eventually cost $550 million annually in lost revenue.

Lifting retirement income tax exemptions – Just as phasing out the estate tax has received bipartisan support this year, so has a push to increase the state income-tax exemptions for sources of income like pensions, annuities, and 401(k) plans. The Sarlo-Oroho plan would take exemptions for those earning over $100,000 that right now are $15,000 for single taxpayers and $20,000 for married couples up to $50,000 for single taxpayers and $100,000 for married couples by 2020. Making those changes would cost up to an estimated $125 million, according to the nonpartisan analysts.

Income-tax deduction for charitable contributions – Right now, New Jersey does not permit taxpayers to take a deduction for charitable contributions, which is something that the federal government does allow. A measure backed by leading Republicans in the state Senate would create a new state income-tax deduction for contributions made to charities, but it would limit the tax break to contributions made only to charities based in New Jersey. By some estimates, creating the deduction could cost as much as $300 million. The Sarlo-Oroho plan calls for a new charitable deduction category that would be further restricted to just social-service charities like homeless shelters and food banks, something that could lower the budget impact to less than $100 million.

Earned Income Tax Credit increase – Last year, Christie worked with Democratic legislative leaders to increase New Jersey’s Earned Income Tax Credit, which provides a tax break to more than 500,000 of the state’s lowest-wage workers. But Democrats have been pushing for another increase of the credit this year, and the Sarlo-Oroho plan would take the credit from 30 percent of the federal credit up to 40 percent. A transportation-funding framework released by Assembly Democrats on Friday called for the same increase this year. If enacted, the size of the average credit would jump from $708 to $963, costing the state an estimated $122 million in lost income taxes, according to legislative analysts.

Income tax deduction for state gasoline taxes – The newest tax-break proposal to enter the discussion is a proposal to allow New Jersey residents to take a deduction on their state income taxes for the cost of paying state gasoline taxes. The proposed gas-tax deduction was put forward for the first time publicly just last week by Oroho, and it made it into the bipartisan plan that he announced on Friday with Sarlo. The credit would be offered to those who pay more than 1 percent of their total adjusted gross income on gasoline taxes. It’s unclear right now how many would qualify for the credit and how it would impact the annual budget.

Inheritance tax relief – New Jersey is one of only two states that tax both estates and inheritances left to heirs. And while there’s been widespread support for getting rid of the estate tax, the inheritance tax has gotten far less attention. Right now, there’s no mention of the inheritance tax in the TTF plan put forward by Sarlo and Oroho on Friday. But Republicans could push for an inheritance-tax cut, which is favored by business-lobbying groups, as they work with Democrats on a final draft of the TTF legislation over the next few weeks.

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