Effort Advances to Circumvent Trump Property-Tax Hit, but Questions Remain

John Reitmeyer | February 16, 2018 | Budget
NJ lawmakers push ahead with creative maneuver to stave off new federal limit on tax write-offs. Skeptics still maintain IRS won’t accept the workaround

While Gov. Phil Murphy’s administration is getting ready to go to federal court to challenge a cap that was recently placed on a longstanding federal tax write-off for state and local taxes, lawmakers in Trenton are advancing a bill that would use some creative accounting to help recapture the deduction for New Jersey homeowners.

Legislation passed by the Senate Budget and Appropriations Committee yesterday would let local governments in New Jersey provide residents with a way to get around the new limit on the write-off that’s known as SALT by setting up special charitable funds that could be used to help pay for local services that are traditionally funded by property taxes, like education, public safety and road maintenance.

The bill’s sponsors are moving ahead even as questions have been raised about whether it will stand up to scrutiny from the Internal Revenue Service, which could view the measure as simply an illegal accounting stunt. Former state Treasurer Andrew Sidamon-Eristoff is among those who have concerns, including in a recent opinion piece published by NJ Spotlight earlier this week.

SALT write-off capped at $10,000

The so-called workaround legislation was proposed as a creative response to the new federal tax law enacted by President Donald Trump and the Republican Congress late last year. Among other changes, the new law capped the previously unlimited SALT write-off at $10,000. That’s considered a low ceiling for many in New Jersey, where the average property tax bill is over $8,500 — and tax bills are much higher in some places in north Jersey. The proposed workaround would allow residents who contribute to the charitable funds to qualify for tax credits to offset their property-tax bills, effectively turning what had been property-tax payments into charitable contributions — which are still fully deductible under the federal tax law.

Murphy, a Democrat who has loudly criticized the new tax rules, has been working with the governors of New York and Connecticut — two other states where taxpayers have also benefitted from an unlimited SALT deduction — to launch a lawsuit against the Trump administration to challenge the federal tax changes on constitutional grounds.

Last week, he called on lawmakers to draft the workaround legislation while addressing a group of mayors in Trenton. But during yesterday’s committee hearing, several Republicans on the budget panel raised questions about the proposal, including its legality.

The federal tax changes signed into law by Trump just before Christmas last year 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 made several changes to rules on federal tax exemptions and deductions, including the SALT write-off.

Possible tax increase for 40% in NJ

While several analyses of the tax changes indicate many New Jersey residents will see some modest tax relief as a result of the overhaul, many others who previously itemized their deductions — an estimated 40 percent of the state’s taxpayers — may see a tax increase; that will be largely due to the establishment of the $10,000 cap on the SALT deduction. That’s because the average annual property tax bill in New Jersey costs more than $8,500, and the state’s per capita state income-tax burden totals nearly $1,500.

The workaround involving the establishment of local charitable funds was first unveiled in early January by U.S. Reps. Josh Gottheimer (D-5) and Bill Pascrell (D-9). Murphy also embraced the idea as a way to retain a write-off for the funding of local services like education, public safety, and road maintenance.

Under the bill approved by the state Senate committee yesterday, towns in New Jersey would be allowed to establish the funds but would not be forced to do so. Homeowners would be permitted to make contributions and qualify for tax credits on their property-tax bills, but they would not be forced to do so. Lawmakers moved the bill forward yesterday even as they acknowledged it may not be a slam dunk with the IRS, citing other states that also offer tax credits for contributions to certain charitable funds.

“The adoption of the proposed tax-credit plan would allow the state of New Jersey to defend itself against the SALT (cap) and at the same time encourage contributions to a variety of noble causes that will be benefit the public,” said Sen. Paul Sarlo (D-Bergen), a prime sponsor of the legislation.

Sidamon-Eristoff, who served as state treasurer under former Gov. Chris Christie, raised a host of questions in the NJ Spotlight opinion piece, including whether other states that operate similar funds to provide credits for things like private-school vouchers are truly good examples of legal precedent for such a scheme in New Jersey, as the proponents have argued.

Taxpayers at risk?

During yesterday’s hearing, Sen. Steve Oroho (R-Sussex) said the state would be better off by going after the root cause of New Jersey’s high taxes, including government spending, instead of pursuing the workaround legislation. Oroho, who is a certified financial planner, said he’s concerned the bill, as written, could put taxpayers at risk.

“The one thing about charitable contributions, and this is why I think it is a risk for us telling our residents to do this . . . the way charitable contributions work is you’ve got to give something, and get nothing in return,” Oroho said.

“That’s going to be a very difficult argument to say you’re not getting anything in return,” he said.

Oroho said since New Jersey also limits the deduction of property taxes at $10,000 on state tax returns, lawmakers should be taking action to eliminate that limit, which is effectively an identical state-level SALT cap.

“One thing we should do right away is all agree that whatever your property tax deduction is, on your New Jersey tax return, allow the full deduction,” he said.

The workaround legislation, meanwhile, was also questioned yesterday by Gordon MacInnes, president of New Jersey Policy Perspective, a liberal think tank based in Trenton. He asked why lawmakers were voting on the legislation on the same day it was introduced, and before copies of it had been disseminated publicly. His organization had previously released a study that suggested the SALT workaround will primarily benefit the state’s wealthiest residents, such as those with large property-tax bills.

“This is not going to be a benefit for most of us in New Jersey,” MacInnes said.