Nearly two years after a major rewrite of the federal tax code capped a longstanding write-off that’s cherished by residents of high-tax states like New Jersey, the new policy remains in effect despite several high-profile efforts to reverse it.
But the leaders of those efforts say they are pressing on, offering some hope to those New Jersey residents who have faced higher tax bills under the now more limited deduction for state and local taxes, commonly referred to as SALT.
The most recent setback in the push for a restoration of an unlimited SALT write-off occurred in federal court earlier this fall when a judge ruled against a lawsuit filed by New Jersey and several other states. The suit sought to nullify the $10,000 cap on the SALT write-off that was enacted as part of the broader tax policy changes President Donald Trump signed into law in late 2017.
Yesterday, state Attorney General Gurbir Grewal announced that New Jersey and the other states involved in the case — Connecticut, Maryland and New York — have officially appealed the decision in federal court.
“The federal government acted unlawfully when it imposed arbitrary and unprecedented limits on the tax deduction for state and local taxes, and it harmed residents all across our state when it did so,” Grewal said.
‘Now is the moment to fix it’
The filing of the appeal comes as several New Jersey representatives are continuing to press for change in Congress, including U.S. Rep. Josh Gottheimer (D-5th). The two-term congressman announced during a public event in Bergen County yesterday that he’s seeking to include a full repeal of the SALT cap in a new piece of federal tax legislation that could go before Congress before the end of the year.
“Now is the moment to actually fix this,” Gottheimer said.
The 2017 Republican tax overhaul, dubbed the Tax Cuts and Jobs Act, was meant to stimulate the economy by reducing individual income-tax rates, and slashing the burden for corporations and those leaving behind large estates. Changes were also made to several exemptions and deductions, including the standard deduction, which was increased. But to help pay for those reductions, the new limit on the SALT write-off was also put in place.
New Jersey taxpayers feel SALT cap pain: NJTV News report
The results of those tax changes — which went into effect for the first time in tax year 2018 — varied widely among tax filers. They hit many New Jersey residents hard since the combination of local property-tax bills, which average nearly $9,000, and high state income taxes could no longer be fully deducted from their federal taxes — thus increasing the amount of income subject to the new federal tax rates. But other residents benefited from the lower income-tax rates or from the increased standard deduction.
Despite the mixed results, New Jersey and the other states that are challenging the SALT cap have been arguing in court that the tax-policy change was effectively an attempt by Congress to coerce state and local officials to levy lower taxes. The states also cited powers granted in the 10th Amendment of the U.S. Constitution to argue that Congress had overstepped its own taxing authority by capping what had previously been an unlimited deduction.
But an initial ruling issued by a federal judge in New York in late September disagreed with the states’ arguments, saying they had failed to make a convincing case that Congress overstepped its constitutional powers.
Murphy supports legal challenge
Still, Grewal’s legal challenge won the backing of Gov. Phil Murphy, a first-term Democrat, and the governor applauded the attorney general’s filing of the appeal.
“My administration remains committed to finding solutions for homeowners wrongly targeted by the federal tax law that limited SALT deductions and exploring all possible avenues to restore full deductibility for our residents,” said Murphy, who last year lifted the cap on a state income-tax deduction for property taxes, from $10,000 to $15,000.
For his part, Gottheimer has been highlighting a recent analysis of real estate data issued by Moody’s Analytics to show how the tax changes have likely impacted his high-tax, high-income district in northern New Jersey. The Moody’s analysis estimated home values in many north Jersey counties took a big hit after the new tax law was enacted, including a nearly 10% projected reduction in Bergen County.
“The point is, this is a wakeup call that we’ve got to actually do something about it,” said Gottheimer, who also referred to recent poll results that suggested more than 40% of New Jersey residents are making plans to leave the state at some point, in part due to frustrations with high taxes.
Gottheimer and New York Republican Lee Zeldin introduced a bipartisan bill earlier this year that would fully repeal the SALT cap, while accounting for the revenue that would be lost by making other tax policy changes, including closing long-overlooked loopholes. Gottheimer said yesterday that he wants the bipartisan proposal to make it into a package of tax legislation that could be put before Congress before the end of the year.
“New Jersey couldn’t ask for a better gift for this holiday season,” he said.
Not all NJ taxpayers have been hit hard
Yet there’s also some evidence that the federal changes haven’t had a major impact on the state economy even as some taxpayers, including those in Bergen County, are being hit hard. For example, the state Treasury’s latest official revenue report showed the state income, sales and realty transfer taxes have all performed better through the first four months of fiscal year 2020 compared to the same period in the prior fiscal year. And despite concerns about a mass exodus of high-income earners, the Murphy administration has reported in recent months that the state’s millionaire cohort continues to increase.
Still, Sen. Steve Oroho (R-Sussex) faulted the administration yesterday for continuing to press the legal challenge to the SALT cap. He said Murphy should instead consider cost-cutting initiatives that he and Senate President Steve Sweeney (D-Gloucester) have been backing for over a year. They include reducing public-worker health benefits and creating a new retirement system for many teachers and other government employees in New Jersey.
“By lowering the cost of government in New Jersey, we have the direct ability to minimize the impact of the SALT cap on New Jersey taxpayers,” Oroho said.