Fed Tax Reform Focuses New Attention on NJ’s Property-Tax Deduction

John Reitmeyer | December 11, 2017 | More Issues
Written into state’s income tax code in 1996, statute allows Garden State homeowners to deduct up to $10,000 of their annual property taxes

U.S. Capitol
The ongoing debate in Washington, D.C., over the fate of a longstanding federal tax write-off for property taxes is generating new interest in a New Jersey tax policy that for the past two decades has allowed homeowners to deduct at least some portion of their property-tax bills.

The increased attention on New Jersey’s property-tax deduction comes as nearly every member of the state’s congressional delegation, as well as Democratic Gov.-elect Phil Murphy, have been critical of a Republican tax bill in Congress that calls for, among other changes, the establishing of a $10,000 cap on a full federal write-off for local property taxes that’s been around for over a century.

Murphy and many others from both political parties have been arguing that by placing a limit on the federal deduction, many of New Jersey’s middle-class residents will be hit particularly hard, pointing to average property tax bills in New Jersey that are already more than $8,500.

But amid the bipartisan pushback, the state’s only representative in Congress who is backing the federal tax legislation — Rep. Tom MacArthur (R-3) — has been pointing to the existing state tax deduction for property taxes. It’s been a part of the New Jersey income-tax code since 1996, and it happens to cap a write-off at $10,000. MacArthur has maintained that preserving the federal deduction, but with a similar $10,000 cap, would cover more than 90 percent of the residents of his district in South Jersey.

Lifting state tax cap

And while the debate about property-tax deductions so far has been focused on the proposed federal tax-policy changes, it has also provided an opening for Republicans in Trenton to press for a lifting of the state’s own $10,000 limit — especially with Democrats like Murphy arguing aggressively that a $10,000 cap will hurt the middle class. In fact, state Sen. Joseph Pennacchio, a Republican from Morris County has already introduced a bill to get rid of New Jersey’s cap altogether.

“I think the state should have no limit,” Pennacchio said during an interview with NJ Spotlight. “I think it’s a matter of fairness.”

Established as law in 1996, the state income-tax deduction for local property taxes, and its $10,000 limit, is one of only a few credits and deductions that are allowed at the state level in New Jersey. The theory behind the deduction is that it prevents a “double taxation” of the same slice of an individual’s income.

Over the past two decades, as funding for other property-tax relief programs has been cut, the state income-tax deduction allowed for property taxes has become the state’s biggest direct property-tax relief program, in terms of pure dollars, costing an estimated $460 million in the current fiscal year budget. That’s more than the nearly $300 million being provided in the budget to cover popular Homestead property tax relief credits, and the $200 million that pays for the state’s “senior-freeze” relief program.

Higher average bills

The effectiveness of the state’s $10,000 deduction has also been eroded over time, as the average New Jersey property tax bill now costs $8,549, which is about $2,100 more than the average bill that was paid by state homeowners a decade ago. Those increases have also come as the median household income in New Jersey has seen little change over the past decade.

At the federal level, a tax write-off for state and local taxes, known as the SALT deduction, has been in place for over a century. And by some estimates, more than 40 percent of New Jersey’s residents are currently using the deduction to reduce the amount of income that is subject to federal taxation.

But in a recent interview with NJ Spotlight, MacArthur cited the state’s $10,000 property tax deduction cap when explaining the reasons why he ultimately decided to vote for the federal tax legislation when it went before the U.S. House of Representatives in October. An initial version of the House legislation would have wiped out the entire SALT deduction.

“The reality is, $10,000 is enough for the vast majority of the people in New Jersey,” MacArthur said at the time.

But during a conference call with reporters that Murphy participated in last week with New York Gov. Andrew Cuomo and California Gov. Jerry Brown, the governor-elect noted that even though the state’s average property tax bill is about $8,500, there are four counties in North Jersey where the average property tax burden tops $10,000. They are Morris, $10,039; Union, $10,821; Bergen, $11,311; and Essex, $11,550.

‘Outside looking in’

“It helps, but it leaves a whole lot of other folks on the outside looking in,” Murphy said.

With a final vote now looming in Washington, Murphy raised the deduction issue again later in the week during a call with New Jersey’s two Democratic U.S. senators, Cory Booker and Robert Menendez. In addition to scaling back the SALT deduction, the federal tax legislation would also significantly reduce corporate rates and ease the way very large estates are taxed by the federal government, among other changes.

“Every member of our delegation is against it — except for one,” Booker said during the call.

But Pennacchio argued that the issue about how a $10,000 cap affects New Jersey homeowners in a state where property taxes is a huge concern is essentially the same whether the discussion is about state or federal policy.

“To me, it’s a little disingenuous to be complaining about a $10,000 cap on property taxes when it’s the United State Congress, when it’s within our power to change what we have in New Jersey,” Pennacchio said.

“It’s almost like complaining about the speck in their eye and missing the boulder in yours,” he went on to say.

Murphy’s camp did not comment Friday when asked about the state’s own deduction, and Pennacchio’s proposal to get rid of it.