BY MICHAEL OLOHAN
OF PASCACK PRESS
SADDLE BROOK, N.J.—A bipartisan bill that aims to restore a full federal deduction for all state and local taxes to New Jersey taxpayers was announced Feb. 11 by a group of legislators at a press conference in Saddle Brook.
The legislation is the latest effort by New Jersey legislators to bypass or end the $10,000 federal deduction limit on state and local taxes imposed by the federal tax reform law passed in late 2017.
President Donald Trump has said he might be willing to negotiate on the cap but whether that will occur is uncertain given negotiations over funding for the federal budget, a $5.7 billion border wall and national emergency declaration.
The legislation, proposed by a bipartisan coalition including U.S. Sen Bob Menendez (D-NJ), Rep. Bill Pascrell Jr. (D-Paterson) and Rep. Andy Kim (D-Marlton), seeks to eliminate the cap on state and local tax deductions, which went into effect for 2018 under Trump’s Tax Cut and Jobs Act of 2017.
2018 SALT cap hits home
Most of the impacts from the $10,000 cap on state and local tax deductions are hitting home now as taxpayers, accountants and tax preparers calculate 2018 income, expenses and deductions to be submitted by the Internal Revenue Service’s April 15 deadline.
Critics of the federal deductions cap, including Gov. Phil Murphy, State Attorney General Gurbir Grewal, and most state Democratic officials believe the tax cut law was intentionally aimed at Democratic-leaning high-tax states such as New Jersey, New York, and California.
The new legislation, the Stop Attacking Local Taxpayers Act, or SALT, aims to restore full deductibility for all state and local taxes, although previous legislative efforts to repeal or bypass the cap have so far failed.
Gottheimer’s efforts
A state law passed in 2018—and championed by Fifth District U.S. Rep. Josh Gottheimer (D-Wyckoff)—to create a workaround by allowing taxpayers to deduct taxes contributed to a municipal charitable trust was disallowed by proposed IRS regulations.
However, Gottheimer, delivering his State of the District address Feb. 11 at Ramapo College, held out hope.
“I’m working on a plan with Republican Congressman Lee Zeldin from New York to stop double taxation and fully reinstate the SALT deduction—without raising tax rates back up,” he said.
“I also spearheaded New Jersey’s charitable tax cut plan to allow our taxpayers to utilize the deduction that 33 other states—mostly red states—already use to save money. I discussed the plan with the Administration just last week, and I’m hopeful that it will ultimately save New Jersey taxpayers real dollars,” he added.
Most Pascack and Northern Valley mayors took a wait-and-see approach on whether to initiate a local charitable trust, with several citing the fund’s uncertain legal status and unfunded administrative costs as obstacles difficult to overcome.
Gottheimer has said Bergen County residents had the highest SALT deduction rate statewide.
Bergen taxpayers suffer most
Recently released IRS data indicated that of all state residents, Bergen County taxpayers will suffer the biggest economic impact from the ruling capping the SALT deduction.
The IRS data show that 47 percent of county taxpayers used the SALT deduction, deducting a total of $5.4 million on property tax bills averaging $24,783 in 2016.
Pascrell said the tax deduction limit specifically harms middle-class New Jersey households and that repealing the cap is a 2019 priority.
He said 37 percent of taxpayers in his district claim a SALT deduction over $10,000. The average deduction is $18,668.
Pascrell called the full federal deductibility of state and local taxes “the oldest deduction in the United States of America. This deduction came out of the Civil War,” he said.
Pascrell cited a recent survey of 300 New Jersey certified public accountants that found more than 63 percent of their individual and family clients who earn less than $200,000 yearly will see federal taxes rise as a result of the cap.
And nearly 70 percent of CPAs said the cap “would definitely or somewhat influence their advice to clients” about leaving the state.
“So this tax season, a lot of my constituents are taking a hit on their tax bills and desperately need relief. This bipartisan effort is about providing that relief to New Jersey taxpayers by reinstating the full SALT deductions our constituents have long enjoyed,” said Pascrell.
Menendez said that in 2016 about 40 percent of state taxpayers deducted state and local taxes averaging $18,000.
‘A high cost state’
“We know all too well that New Jersey is a high cost state, where families face high property tax bills and high cost of living. Well, our bill is designed to provide some relief. Generally speaking, the more you pay in property and state taxes, the more relief you’ll get from our bill,” Menendez said in a statement.
“Allowing property taxes to be fully deducted has been a bedrock principle of our tax code and is common-sense tax policy that rewards states that invest in things like education, public safety, infrastructure and economic opportunity for all,” added Menendez.
“The [state and local tax] deduction allows taxpayers to write-off taxes paid at the state and local level from their federal income tax bill so they won’t be subject to being taxed twice on the same dollar,” noted Menendez.
NJ’s SALT cap lawsuit
In July 2018, four states including New Jersey, sued the federal government for violating the U.S. Constitution noting the “highly rushed and partisan process” that resulted in tax code reforms in December 2017 infringes on states’ “sovereign authority to determine their own taxation and fiscal policies.”
“Simply put, the federal government violated the Constitution when it imposed new, arbitrary limits on the amount of state and local taxes that residents could deduct on their federal tax returns,” Grewal said last summer.