The idea of eliminating the so-called SALT deduction, which allows residents to deduct state and local taxes on their federal tax returns, received almost universal derision from New Jersey lawmakers. Members of the state Senate from both parties representing all regions of the state voted 34-0 yesterday to oppose the Trump administration’s plan to get rid of the provision in the federal tax code that helps offset New Jersey’s highest-in-the-nation property tax bills.
The display of bipartisan unity in Trenton came on the same day most members of the state’s congressional delegation voted in the U.S. House of Representatives against a budget bill that would help pave the way for Trump’s plan to eliminate the longstanding federal tax deduction for state and local taxes. Two New Jersey congressmen — Rep. Rodney Frelinghuysen (R-11) and Rep. Tom MacArthur (R-3) — voted in favor of the House’s spending plan.
The SALT deduction is treasured by residents of high-tax states like New Jersey, and by some estimates, getting rid of it would lead to higher tax bills for more than 40 percent of the state’s taxpayers, with the middle-class hit particularly hard. But the Trump administration needs the savings that would come from eliminating the tax deduction — some $100 billion annually — to help pay for a series of proposed tax cuts, including for high earners and corporations.
The resolution passed by the state Senate yesterday warned Trump and the Congress that eliminating the deduction would have a “significant, negative impact” on New Jersey and its residents. And while the Senate’s action has no formal bearing on what will ultimately happen in Washington, D.C., sponsors of the resolution said it nonetheless sent a strong statement of the state’s firm opposition. Meanwhile, a Republican state senator also introduced new legislation yesterday that would increase the state’s own income-tax deduction for property taxes, in part to offset any change that may come from Washington.
The state and local tax deduction dates back more than 100 years, to the early days of the federal tax code itself. But it has long had its critics, and it was almost eliminated 30 years ago, which is the last time any major reform of the tax code was attempted.
Opponents of the SALT deduction argue that it essentially rewards high-tax states like New Jersey for not having more discipline, while also forcing taxpayers in more frugal locations to subsidize those in less thrifty areas.
Roots in colonial America
But the SALT deduction’s defenders say it prevents double or even triple taxation of the same personal income by multiple layers of government, a theme that goes back all the way to the country’s colonial days and the influential Federalist Papers.
After focusing for much of this year on unsuccessful efforts to roll back the Affordable Care Act, also known as Obamacare, Trump is now prioritizing a large-scale overhaul of the tax code that administration officials first outlined in April. Trump’s latest version of the tax overhaul calls for a reduction of the top-end income-tax rate and of corporate tax rates, and an elimination of the federal estate tax. Trump, meanwhile, has also promised to deliver middle-class property-tax relief by streamlining tax brackets, and by doubling the standard deduction. But many of the finer details have yet to be released, making it difficult to fully analyze those elements of his plan.
While many believe that the SALT deduction only benefits states that are dominated by Democrats, research from the Washington, D.C.-based Tax Policy Center indicates middle-class homeowners in many Republican congressional districts across the country are also among those that would be most affected.
Earlier this week, U.S. Rep. Leonard Lance (R-7) came out strongly against getting rid of the SALT deduction, saying his district is among those that would see the biggest hit if the provision doesn’t survive Trump’s tax overhaul. Lance was also among the 10 members of the state’s congressional delegation to vote against a budget bill yesterday that would help pave the way for the Trump tax plan.
The bill was ultimately passed, with the support of Frelinghuysen and MacArthur, in a 219-206 vote. At yesterday’s daily White House press briefing, Trump press secretary Sarah Huckabee Sanders pushed back against criticism of the proposed elimination of the SALT deduction, saying most U.S. taxpayers don’t itemize their deductions, and thus don’t have anything to lose if the deduction for state and local taxes is no longer provided.
Subsidizing the wealthy
“The fact is, it isn’t fair and it doesn’t make sense for working Americans across the country to subsidize the very wealthy in a few states,” Sanders said.
But in high-cost New Jersey, where the average property tax bill last year was $8,549, more than 40 percent of taxpayers take advantage of the SALT deduction, according to the nonpartisan, Washington, D.C.-based Tax Foundation, with an average adjusted-gross income of $81,344. The Tax Policy Center has also estimated an average tax increase of $3,522 would be felt by those in New Jersey who claim the SALT deduction if it is eliminated.
The sponsors of the resolution that passed the state Senate yesterday noted that the tax cuts proposed by Trump would mostly benefit the very wealthy, but the funding for those tax breaks would come in part from New Jersey residents who already provide more in revenue to the federal government than what comes back through federal programs or grants. A recent analysis by WalletHub.com also determined that only Minnesota and Delaware depend less on the federal government and its resources than New Jersey.
“The Trump tax plan is blatantly unbalanced and unfair,” said Senate Majority Leader Loretta Weinberg (D-Bergen).
“It’s not ‘tax reform’ when working families are forced to pay more,” said Senate Budget and Appropriations Committee Chairman Paul Sarlo (D-Wood-Ridge).
In New Jersey, the current state tax code allows homeowners to deduct up to $10,000 in property taxes on their state income-tax returns. The deduction was created through state law about 20 years ago, and the current state budget assumes it will cost a little more than $462 million in lost revenue.
But yesterday, state Sen. Jennifer Beck (R-Monmouth) proposed legislation that would move the ceiling on the deduction up to $17,500, something she linked to the ongoing tax-overhaul discussions in Washington. Under her bill, the increase of the deduction would occur in three annual phases, with the ceiling rising by $3,500 each year.
“New Jersey residents are some of the most highly taxed people in the country, and I’m concerned that proposed federal tax reforms will add to the burden,” Beck said.