Law Lets Local Governments Treat Property Taxes as Charitable Contributions

John Reitmeyer | May 7, 2018 | Budget
Mayors are happy with new workaround, and state’s congressional delegation says it’s willing to fight for it, but nonprofits think it could kill charitable giving they depend on

Gov. Phil Murphy signed the "workaround" law on May 4.
New Jersey has a new law to help residents go on the offense against President Donald Trump’s decision to cap a longstanding write-off for local property taxes. Whether the federal government will accept the state’s response — and the lost revenue that will likely come with it — remains to be seen.

A key feature of the law enacted by Gov. Phil Murphy on Friday is giving municipal and county governments and school districts the legal authority to create special charitable accounts to help pay for costly municipal services like public safety, education, and road maintenance that are usually funded through the property tax.

Equally as important, the law also lets local governments offer residents who contribute to the new accounts a nearly dollar-for-dollar property-tax credit, effectively turning their property tax bill, at least on paper, into a charitable contribution.

The federal tax changes that Trump signed into law last year slightly lowered individual income-tax rates and increased the standard deduction, while also significantly trimming the federal tax burden for corporations and those with large estates. While several analyses of Trump’s tax-code changes indicate many New Jersey residents could see some modest relief, many others who have itemized their deductions in the past are likely to see an increase due, in part, to the new, $10,000 cap on the SALT (state and local taxes) deduction. That’s considered to be too low a ceiling for many homeowners in high-cost New Jersey, where the average property tax bill is about $8,700, and the average state income-tax liability is nearly $1,500.

A charitable loophole

Dubbed a “workaround” due to the change in deductions, the measure went through the state Legislature earlier this year. The new law creates a loophole using charitable contributions.

But Murphy’s signature only begins the next phase in the state’s efforts to combat the negative effects of the federal tax changes. Next up for state government is figuring out how to write the complicated regulations that will allow the charitable funds to function in an era when many homeowners don’t send their taxes directly to a municipal tax collector’s office, but instead pay them through a mortgage company. Meanwhile, there’s also the whole issue of whether the federal Internal Revenue Service will actually let stand what was brazenly designed to serve as a tax loophole for New Jersey residents, and there have already been some indications that the new law could be deemed unacceptable by the Trump administration and the Internal Revenue Service.

When it officially takes effect in about two months, the new law enacted by Murphy on Friday in East Rutherford gives towns, counties, and school districts in New Jersey the option of paying for local services using accounts that will be designated as charitable funds. In order to make it work for taxpayers, the local governments will be allowed to provide those who contribute to the new funds property-tax credits worth up to 90 percent of the value of their contributions. The new law will also maintain the state’s up to $10,000 income-tax deduction for property taxes for those who pay into the new accounts.

Thumbs up from NJ mayors

Murphy’s administration distributed comments on Friday from a host of mayors throughout the state who are ready to give it a try. It’s also won the endorsement of East Rutherford Mayor James Cassella, who serves as president of the New Jersey State League of Municipalities.

“This legislation can have a positive effect on so many people here in New Jersey,” Cassella said.

New Jersey’s not the only high-tax state to propose a tax workaround in the wake of Trump’s overhaul of the tax code, and a critique of such efforts published earlier this year by the Washington, D.C.-based Tax Foundation argued that a charitable contribution has to be a true “gift,” with nothing of value received in return, in order for it to be considered deductible under federal law. It’s also already been questioned by Trump administration Treasury Secretary Steve Mnuchin.

Closer to home, former state Treasurer Andrew Sidamon-Eristoff, who served under Republican Gov. Chris Christie, raised a series of legal questions about the workaround in a NJ Spotlight opinion piece. A recent member poll conducted by the New Jersey Society of Certified Public Accountants found that more than 70 percent believe the workaround scheme will not pass muster with the IRS.

Not all in favor

Meanwhile, other concerns about the workaround have come from the state’s nonprofit community, which is already worried that the Trump tax overhaul could lead to fewer donations being made by New Jersey residents due to the increased standard deduction. An analysis of the workaround released earlier this year by the Center for Non-Profits suggested the new charitable accounts could present another issue for non-profits.

“There is a concern that giving could be affected if taxpayers feel that they’ve already made their ‘donations’ by paying their taxes via this mechanism, placing impossible pressures on foundations to fill the gaps and leaving vital needs unmet,” according to the analysis.

But the legislation has strong backing from most members of New Jersey’s congressional delegation, including primary proponent Josh Gottheimer (D-5). He’s pointed to research compiled by several top tax-law scholars that backs up the legality of the approach that New Jersey is using to counter the new SALT deduction cap. And if there is a fight looming over the workaround law, Gottheimer and other members of the Congress say they are ready duke it out with the Trump administration.

“I think we are on solid ground in doing this, and we are going to fight every step of the way,” said U.S. Rep. Bill Pascrell (D-9). “We are going to stand up for our rights.”

Murphy also said dozens of other states have been allowed to offer tax credits to residents in exchange for charitable donations, including many whose state governments are run by members of the president’s own political party. That means the tax credits would have to be abolished in those Republican states if Democratic New Jersey’s are not allowed to stand, Murphy said.

“That’s a pretty tall mountain to climb,” Murphy said.