Two New Jersey congressmen are leading a bipartisan push to convince the Trump administration to drop a proposal to eliminate a federal income-tax deduction that helps offset New Jersey’s highest-in-the-nation property tax bills.
A letter sent earlier this week by U.S. Reps. Leonard Lance (R-7th), Bill Pascrell (D-9th), and 68 other members of Congress — including the rest of New Jersey’s House delegation — urges the administration to back off plans to get rid of a longstanding federal policy that allows taxpayers to deduct state and local taxes from their federal taxable income.
The deduction is treasured by residents of high-tax states like New Jersey. By some estimates, getting rid of it would mean the average taxpayer here would have to pay an additional $3,500 in federal taxes.
“Faced with an already high tax burden and high cost of living, our communities cannot afford another increase to their taxes,” the bipartisan letter said.
A call for patience
But proponents of eliminating the deduction have said it effectively rewards leaders in high-tax states for not doing a better job of controlling spending. House Speaker Paul Ryan suggested yesterday during a CNBC interview that residents in those states could still make out better under the overall tax-policy changes that are up for discussion. Gov. Chris Christie, a Trump supporter, has also offered a similar call for patience in response to the release of Trump’s tax proposal.
Trump administration officials first floated the idea of eliminating the federal income-tax deduction for state and local taxes as part of a broader proposal to revise federal tax policy that was put forward in late April. That plan is now under review in the GOP-controlled House, where leaders have also favored getting rid of the state and local tax deduction.
Under the Trump administration’s proposal, the federal tax code would be simplified by reducing the number of tax brackets from seven to three. Every federal income-tax deduction except those allowed for charitable contributions and mortgage interest would also be eliminated, while the standard deduction would be increased from $12,700 to $24,000.
The Trump plan would also reduce the top-end personal income-tax rate from 39.6 percent to 35 percent, and slash the corporate-tax rate from 35 percent to 15 percent, all in an effort to grow revenues by expanding the overall tax base. The federal estate tax would also be repealed, as would the alternative-minimum tax, which is paid by more than 80 percent of New Jersey residents making between $200,000 and $500,000, according to the Washington, D.C.-based Tax Foundation.
But to help pay for the tax cuts, the plan relies on getting rid of the deductions like the offset for state and local taxes (SALT). That deduction is worth an estimated $96 billion in lost federal tax revenue, according to the nonpartisan Tax Policy Center, with residents in states like New Jersey, New York and California benefitting the most from it.
For example, New Jersey homeowners paid average property-tax bills of $8,549 last year, the highest bills in the nation, and New Jersey also maintains some of the highest marginal income-tax rates in the country, including an 8.97 percent tax on earnings over $500,000.
The letter sent to U.S. Treasury Secretary Steven Mnuchin by Lance, Pascrell, and the other federal lawmakers said nearly 85 percent of those who currently claim the state and local income-tax deduction in New Jersey have household incomes below $200,000. That means the elimination of the deduction would primarily impact low- and middle-income taxpayers, with an estimated hit of $3,500 for the average New Jersey taxpayer, the letter said.
The lawmakers also cited Tax Foundation research that determined New Jersey already ranks among the states that get the least amount of funding back from the federal government compared with the contributions made by its taxpayers.
“Our states are economic engines that deliver disproportionately more revenue to the federal government than they receive back, paying more for service delivered to the country at large,” the letter said.
Christie, a second-term Republican, also proposed getting rid of the state and local income-tax deduction as part of a broader federal tax-reform policy during his own failed run for president last year. But Christie maintained his own plan could have benefitted New Jersey taxpayers because cuts in the marginal income-tax rates would have largely offset the loss of the deduction. President Donald Trump has yet to spell out the income ranges for the new tax brackets that he’s proposing, so it’s hard to determine right now exactly how New Jersey taxpayers will fare under his plan.
“We cannot make that judgment without first knowing what both sides of the equation are,” Christie said while taking questions from reporters inside the State House after a recent news conference.
“If it turns out that’s it’s a net-negative in a significant way for New Jersey, I’ll express that,” Christie said. “If it turns out that it isn’t, I don’t want to oppose something that I should actually wind up supporting sometime later on.”
Ryan, speaking during the CNBC interview yesterday, said his goal is for lawmakers to work with Trump administration officials and others throughout the summer to come up with a final version of a tax-reform proposal by the fall. He also held firm to the notion that the state and local income-tax deduction should be eliminated, arguing that taxpayers in his own state of Wisconsin shouldn’t subsidize those in other states where taxes and spending are higher.
“Let’s stop masking profligate governments,” Ryan said.
He also said that many taxpayers could fare better due to the other changes in tax policy that could be made as the reform effort progresses.
“Look at tax reform in its totality,” Ryan said.