GOP Rub SALT in Wound, Push for Permanent Cap on Tax Deduction

John Reitmeyer | September 12, 2018 | Budget
Adding to woe for New Jerseyans, IRS undercuts Murphy administration’s attempt to help taxpayers get around federal limit on deduction for state and local taxes

Houses Street
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 $
Atlantic 132,660 53,739 45,860 34.6 0.51 11,021
Bergen 465,350 111,181 218,290 46.9 5.41 24,783
Burlington 225,050 77,912 101,690 45.2 1.44 14,153
Camden 245,100 65,281 95,540 39.0 1.29 13,491
Cape May 49,930 61,696 17,830 35.7 0.20 11,319
Cumberland 66,150 47,683 18,080 27.3 0.16 9,012
Essex 372,130 85,621 131,980 35.5 3.10 23,490
Gloucester 140,720 70,463 64,020 45.5 0.82 12,735
Hudson 332,760 69,103 97,290 29.2 1.41 14,491
Hunterdon 64,920 121,101 36,410 56.1 0.76 20,935
Mercer 174,760 92,659 73,540 42.1 1.46 19,855
Middlesex 404,770 76,604 169,270 41.8 2.54 15,024
Monmouth 321,630 101,483 156,950 48.8 3.12 19,888
Morris 253,750 125,309 132,570 52.2 3.14 23,699
Ocean 286,100 64,762 120,220 42.0 1.40 11,631
Passaic 249,170 58,074 81,870 32.9 1.20 14,714
Salem 30,320 58,937 10,920 36.0 0.12 10,990
Somerset 168,810 122,100 86,700 51.4 2.00 23,119
Sussex 72,640 78,374 35,730 49.2 0.51 14,267
Union 274,290 84,019 110,110 40.1 2.18 19,830
Warren 53,550 68,159 23,520 43.9 0.30 12,588
New Jersey 4,384,460 84,547 1,828,350 41.7 33.08 18,092