Amid concerns that federal tax changes may be limiting charitable giving in New Jersey, the state Senate voted overwhelmingly yesterday in favor of legislation that would establish a state income-tax write-off to encourage more donating.
The proposed state deduction is not as open-ended as the existing federal write-off for charitable giving; it would provide the state tax break only for contributions made to “qualified New Jersey-based” groups.
But sponsors of the legislation who have been trying to establish such a state-level deduction in New Jersey for over a decade say it would still give a much-needed boost to the state’s food banks, homeless shelters and other nonprofit organizations by providing a new state tax break for those who make donations.
“It’s huge progress,” said Senate Minority Leader Tom Kean Jr., the bill’s longtime sponsor, after yesterday’s Senate session.
Despite yesterday’s triumph, the tax write-off bill has yet to advance at all in the Assembly, leaving its fate in doubt. And nonpartisan legislative analysts have estimated the proposed write-off could cost the state budget as much as $365 million annually, which is no small amount of money for a state that is already struggling with significant fiscal challenges.
Other states offer a deduction
More than a dozen states, including neighboring New York and Delaware, already offer some type of a state-level income-tax deduction for charitable donations, just as the federal government does. But New Jersey has been among the states that have offered no such incentive even though legislation seeking to create a deduction has been introduced in every legislative session since at least 2007.
This latest effort to establish a state-level write-off seems to have been propelled by federal tax changes enacted in 2017 that many are just starting to see the effects of this year. The changes include a widening of the standard deduction and the capping of a federal write-off for state and local taxes known as SALT. Nonprofit organizations in New Jersey, where the SALT cap is a particular concern, have feared the federal tax changes mean some taxpayers will no longer get to enjoy a federal tax break for their contributions, which could give them less of an incentive to give.
The notion that such a state-level income-tax deduction should be established in New Jersey also got a boost last year from a nonpartisan group of fiscal-policy experts who included it in their list of recommendations for updating state regulations in the wake of the federal tax changes.
The bill that passed the Senate yesterday in a 38-0 vote would establish a New Jersey income-tax write-off for charitable giving for donations that are made to “qualified New Jersey-based charitable organizations.” It defines the organizations as those “registered pursuant to the Charitable Registration and Investigation Act, or an organization that is exempt from the registration requirements of that act.” Another requirement is that the charity “maintains an office, employs persons, and provides services in this State.”
Kean, the bill’s longtime sponsor, said yesterday that the state’s charitable organizations are “on the ground doing extraordinary work in every corner of the state.” He also suggested the charities are better at what they do and more cost-effective than state government would be if it had to pick up the slack.
Could cost up to $365M in annual tax revenue
“This legislation will provide a significant boost to the nonprofit charitable organizations that provide critical services to seniors, disabled residents, and families in need across New Jersey,” he said.
Currently, New Jersey offers very few income-tax deductions; the most notable one is the state’s write-off for local property taxes, which allows up to $15,000 to be deducted annually by taxpayers. Although it’s popular with homeowners, the property-tax write-off costs the state an estimated $675 million in annual revenue.
The initial fiscal estimate for the proposed charitable contributions write-off that was prepared by the nonpartisan Office of Legislative Services projected the deduction would cost the state budget between $215 million and $365 million in annual tax revenue. The basis of the OLS estimate was data from the 2016 tax year that showed 1.5 million New Jersey taxpayers claimed $6.7 billion in itemized charitable deductions on their returns that year.
During yesterday’s Senate debate, Sen. Steve Oroho (R-Sussex) pushed back against concerns about the potential loss of revenue that would occur if the deduction is established by suggesting the charities would be gaining much-needed revenue at the same time the Treasury takes a hit.
“It will cost cents on the dollar,” Oroho said.
Kean said he estimates the nonprofits would get a $30 value for every $1 that is deducted from state taxes, based on the income taxes paid by the average New Jersey household.
“It’s a real net benefit for the true fabric of New Jersey, which are these nonprofit institutions,” he said.
The deduction could also help keep more people who are frustrated with the new cap on the federal SALT deduction — which is set at $10,000 — from leaving New Jersey, he said. That would mean their income-tax payments would remain in the state’s revenue stream even if some of their taxes would be sacrificed to the proposed deduction.
“This is a middle-class tax cut that will do a lot to make the state more affordable,” Kean said.