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Workaround Could Help NJ Residents Offset Loss of SALT Deduction

Clever stratagem would make fully tax-deductible charitable contributions pay for services now funded by state and local taxes

Gottheimer
U.S. Reps Gottheimer (left) and Pascrell, joined by Gov.-elect Murphy.

Many New Jersey homeowners no longer have the ability to deduct the full amount of their local property-tax bills thanks to recent federal tax changes signed into law by President Donald Trump. But those homeowners could soon get an opportunity to take a new federal write-off under a workaround proposal that’s starting to generate support in New Jersey.

The key to the creative proposal is the recent decision in the Republican-controlled Congress to preserve the full deductibility of charitable contributions, but not for taxes paid to state and local governments. In response, the proposal calls for the state and towns to create charitable funds for citizens to donate money to in order to support schools and other services. In turn the town or state would provide tax credits to donors.

Some states already maintain similar funds — providing a key precedent — and others are considering doing so. The proposal has already won the support of Gov.-elect Phil Murphy, as well as the New Jersey Chamber of Commerce.

Without the creation of new charitable funds, the loss of a full federal write-off for taxes paid to state and local governments, including income and property taxes, is expected to particularly hurt New Jersey homeowners, given its highest-in-the-nation property taxes, as well as possibly damage the value of residential real estate. Known as SALT, the state and local tax deduction is now capped at $10,000, meaning thousands of New Jersey residents — particularly those who itemize their deductions in parts of the state where home values are high – are facing a federal tax hike.

Hardworking workaround

However, with the write off for charitable contributions left in place, the workaround proposed by U.S. Reps. Josh Gottheimer (D-5) and Bill Pascrell (D-9) would take advantage of that technicality through the charitable funds, which would be used to pay for the costly services that are currently covered by property taxes in New Jersey, including K-12 education, public safety, and road and bridge maintenance.

Corresponding tax credits could offset property-tax liabilities for those donating to the new charitable funds, and with a similar setup in place at the state level, the full effect of the SALT deduction could largely be preserved despite the recent changes made in Washington, D.C., according to the proposal.

“Why wouldn’t we do everything humanly possible to cut taxes for our hardworking families?,” said Gottheimer, as a he rolled out the proposal during a news conference in Fair Lawn last week.

Several mayors from Bergen County, where property taxes average $11,311, are already offering to be the guinea pigs for the new idea.

“We look forward to pushing this forward,” Paramus Mayor Richard LaBarbiera said.

The federal tax changes signed into law by Trump just before Christmas slightly lowered individual income-tax rates and, among other changes, significantly cut the federal tax burden for corporations and those with large estates. To help pay for those cuts, the tax-code overhaul also made several changes to rules related to federal tax exemptions and deductions.

Tax increase ahead

While several analyses of the changes indicate many New Jersey residents could see some modest tax relief as a result of the overhaul, many others who itemize their deductions are likely to see an increase due, in part, to the new, $10,000 cap on the SALT deduction. That’s stoked concerns among Murphy and others that the tax changes could end up bringing on economic problems in New Jersey, including depressing the housing market by removing a key incentive for home ownership. Ultimately, only one member of New Jersey’s congressional delegation, U.S. Rep. Tom MacArthur (R-3), voted in favor of the tax changes endorsed by Trump.

Gottheimer, who was one of the “no” votes in Congress, pointed to Fair Lawn as a prime example of the how the changes could hit many New Jersey residents. The average property tax bill in Fair Lawn is more than $13,000, he said, meaning many homeowners will easily be over the new $10,000 cap on the SALT deduction.

Charity begins at home

But if the community were to create a new charitable fund that would generate revenue from voluntary donations from residents to cover costs that right now are paid for by their property taxes, the contributions to that fund would be fully deductible under the revised federal tax rules, the congressman explained. Thus, while the total that’s paid “out-of-pocket” would be the same, the homeowners would recoup the full tax benefit they used to enjoy under the old SALT rules using the charitable deduction, Gottheimer said.

Pascrell framed the issue as one of overall equity since the loss of the SALT deduction is expected to exaggerate an existing imbalance in the amount of taxes paid by residents of high-income states like New Jersey versus the funds those states receive back through federal grants and programs.

“What we’re talking about is fairness,” Pascrell said.

While some groups have already begun to question the legality of such workarounds as other high-tax states like California and New York have been proposing policies in response to the federal changes, Gottheimer said the key to the charitable-contribution proposal is that there are already precedents set in other states that have passed muster with the Internal Revenue Service.

In all, 22 states have some sort of charitable fund where tax credits are offered in exchange for contributions that are fully deductible from federal taxes. The contributions in those states, which include Alabama, Arizona, Mississippi, and South Carolina, support services like education, land preservation, and foster care, Gottheimer said.

Precedent established

Murphy said it’s that element of the proposal that drew his attention as a host of different ideas have been swirling around in response to the federal tax changes.

“There is precedent, and that’s the important point here,” Murphy said. “The IRS has sanctioned and blessed this provision, this approach.”

While it’s unclear right now whether it will take any action at the state level to ensure the proposal can move forward, Murphy said that would be a top priority for him to take on with Democratic legislative leaders when he takes over the governor’s office in Trenton next week.

“We want to pursue this aggressively,” he said. “We are all-in on this.”

Meanwhile, a statement released in response to the proposal by the New Jersey Chamber of Commerce praised Gottheimer and Murphy, and it also called for leaders from both parties to give the proposal prompt consideration.

“While details of their proposed plan need to be finalized, these leaders have done New Jersey taxpayers a great service by proactively taking on this tough issue and helping reduce what would otherwise be a significant financial hardship for many of these taxpayers,” the statement said.

Like LaBarbiera, the Paramus mayor, Park Ridge Mayor Keith Misciagna said he’s also willing to give the proposal a shot in his community.

“New Jersey is already an expensive state to live in, and without some action on our part, these changes will drive people out of our state,” Misciagna said.

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