Just weeks after New Jersey and other high-tax blue states filed a lawsuit seeking to undo the recent capping of a key federal write-off for state and local taxes, Congressional Republicans are moving forward with plans to make the cap a permanent part of the tax code.
What’s more, the Internal Revenue Service has changed its regulations in order to make it harder for
states to create effective workarounds that let individuals donate to a civic charity that would then be used to pay for government services.
A series of GOP-sponsored bills that were introduced in Washington, D.C. earlier this week seek to remove expiration dates that were attached to a number of tax revisions enacted last year, including a $10,000 limit on the longstanding deduction for state and local taxes known as SALT.
The $10,000 cap was set to expire in 2025 under the original tax legislation signed into law by President Donald Trump last year.
The money that Congress has saved by capping what had been a generally unlimited deduction is helping to offset revenue losses caused by other big tax policy changes, including corporate-tax reductions. But Democrats have loudly criticized Republican leaders for establishing the SALT limit, and a lawsuit filed in July by officials from New Jersey, New York, Connecticut, and Maryland is seeking to overturn the $10,000 cap on the grounds that it unfairly targets residents of high-cost, majority Democratic states like New Jersey.
Gottheimer: ‘It’s a raw deal’
The push to make the SALT cap a permanent part of the tax code also coincides with the release of new Internal Revenue Service data that indicate average taxpayers in New Jersey who have used the deduction will face a tax hike in nearly every county thanks to the new cap, generating a new round of outrage from Democrats.
“Any new effort to gut SALT permanently should be voted down because it’s a raw deal for so many Americans, including New Jersey,” said U.S. Rep. Josh Gottheimer (D-5th).
Among the many tax changes included in last year’s federal tax overhaul was a lowering of individual income-tax rates and a significant reduction of the federal tax burden for corporations and those with large estates.
While several analyses of the changes in tax policy indicate many New Jersey residents will see some modest tax relief because of the overhaul, many others who itemize their deductions are now in line to see a tax increase even though the standard deduction has been expanded, largely due to the $10,000 SALT cap. That’s because the average annual property-tax bill in New Jersey is nearly $8,700 and the per capita state income-tax burden for New Jersey residents totals nearly $1,500.
In fact, according to the latest IRS data, the average New Jersey taxpayer who uses the SALT deduction was able to write off more than $10,000 from their federal taxes during the 2016 tax year in 20 out of the state’s 21 counties. The deduction was worth as much as $24,783 on average for those who took it in Bergen County in 2016, and as little as $9,012 in Cumberland County — the only place in New Jersey where the average SALT deduction did not exceed the $10,000 limit, according to the data.
IRS moves to stymie Murphy’s workaround
In addition to filing the federal lawsuit to oppose the new SALT cap, Gov. Phil Murphy also enacted legislation earlier this year that sought to establish a workaround for New Jersey taxpayers based on the full deductibility for charitable contributions that the federal tax code still allows. Under the workaround, local governments can create charitable organizations to collect donations from residents to fund services — like education and local law enforcement — that traditionally are paid for using property taxes. It also allows the local governments to offer tax credits to residents who donate to the new civic groups that offset their property tax liabilities.
But earlier this summer the IRS moved to block the effectiveness of the workaround law, and now the GOP leadership in the House is pushing to make the individual income-tax changes permanent, including the SALT cap.
“This legislation is our commitment to the American worker to ensure our tax code remains the most competitive in the world,” said U.S. Rep. Kevin Brady (R-Texas), who chairs the House Ways and Means Committee.
It remains to be seen whether the GOP’s new tax changes will make it through the Senate. Although Republicans are in control there, procedural rules make it harder to adopt policies in the Senate without getting at least some votes from the minority party.
Lance in a tough spot
Still, the introduction of the House legislation has put many blue-state Republicans like New Jersey’s Leonard Lance (R-7th) in a tough spot during a key election year when control of the House is at stake. According to the new IRS data, Lance’s district is one of those hit hardest by the new SALT cap.
In a recent appearance on CNBC, Lance bucked party leadership by saying he supports the full deductibility of state and local taxes. He also called the House’s possible adoption of the new tax legislation “an exercise in futility” since it is unlikely to pass the Senate due to opposition from Democrats.
Meanwhile, Gottheimer and U.S. Rep. Bill Pascrell (D-9th) were more direct in their response to the new House tax legislation, with Gottheimer saying the new IRS data “just prove what we’ve been saying all along.”
“The Tax Hike Bill jacks up taxes significantly on New Jersey families,” he said.
Pascrell, who also serves on the Ways and Means Committee, said “the sequel is almost always worse than the original.”
“In their own words, Republicans wanted to maliciously bring pain to New Jersey — and they succeeded,” he said.
|County||Filers||Average AGI $||Number claiming state/local tax||% of filers claiming SALT||Total SALT amount deducted in $ billions||Average SALT deduction $|