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New Jersey lawmakers moved on a number of bills and resolutions Feb. 15 in response to federal tax changes—including a bill to permit prepayment of property taxes and another allowing charitable contributions to get around a new federal deduction limit.
The legislative fixes are among proposals being discussed in the Garden State to ease tax burdens created by the 2017 federal tax act ( Pub. L. No. 115-97). The new federal law, among other changes, caps the state and local tax (SALT) deduction at $10,000 and lowered the amount of mortgage interest that can be deducted. That has led to a loud outcry in New Jersey, which has some of the highest property taxes in the country.
Gov. Phil Murphy (D) supports the idea of using charitable contributions as a way around the $10,000 deduction limit, which he called a “gut punch” from Congress. He isn’t alone.
Politicians in several states are considering similar workarounds, and lawmakers have already introduced charitable-contribution bills in California, Illinois, and New York.
The General Assembly passed A.B. 3382, which would permit taxpayers to make dedicated prepayments toward anticipated property taxes. Sponsored by Democratic Assemblymen Roy Freiman and Vincent Mazzeo and Assemblywoman Joann Downey, the bill passed by a vote of 70-1 with one abstention.
Under current law, a tax collector wouldn’t be required to accept prepayments unless the local municipality had passed a resolution to allow it.
The bill now goes to the Senate, where it doesn’t yet have a companion bill number. If signed into law, it would take effect immediately and would be retroactive to July 1, 2017.
Residents in many high tax states started prepaying their 2018 taxes in late 2017 in the hope that they would be deductible.
However, the IRS said in late December that taxpayers could only deduct 2018 property taxes on their 2017 tax returns if the levy had been assessed by local officials in 2017. The guidance ( IR-2017-210) was an attempt to clarify whether taxpayers were eligible for the tax break as people lined up at city and county government buildings to prepay taxes between Christmas and the end of the year.
Two New Jersey House members met with David Kautter, the acting IRS commissioner, Feb. 15 urging him to make all 2018 property tax prepayments made in 2017 to be fully deductible.
The two lawmakers—Reps. Leonard Lance (R-N.J.) and Josh Gottheimer (D-N.J.)—have introduced legislation to allow taxpayers to deduct their entire 2018 property tax prepayments from their 2017 bill.
“Our meeting was productive. Over $300 million dollars in property tax prepayments were made by my constituents in late 2017 and I will continue to make the case that all 2018 property tax prepayments be fully deductible on 2017 tax returns,” Lance said in a statement.
The New Jersey Assembly also passed Assembly Concurrent Resolution 145, which urges the U.S. Congress to take swift action to protect New Jersey taxpayers from changes under the new federal tax law.
More than 40 percent of all New Jersey residents use the SALT deduction to lower their federal taxes, with the average deduction at $17,850, the resolution says.
The resolution passed the Assembly Feb. 15 by a vote of 63-5 with one abstention.
Also on Feb. 15, the Senate Budget & Appropriations Committee voted to advance S. 1893, a bill that would allow New Jersey residents to opt for a charitable contribution in lieu of local taxes.
New Jersey Policy Perspective, a progressive policy group, called the measure a “gimmicky” workaround that would end up benefiting the state’s wealthiest families without fixing other problems in the state’s tax code.
Details of the bill remain unclear because it hasn’t yet been made public, Jon Whiten, the group’s vice president, told Bloomberg Tax in an email Feb. 15.
Several states, including New York and California, have tried to avert the federal tax act by looking to expand their use of charitable tax credits.
State tax professionals, however, remain wary that this will get past federal scrutiny.
And Treasury Secretary Steven Mnuchin, during a Jan. 12 talk in Washington, threatened to target tax audits at residents of states that allow deductions for charitable donations to state charities that provide funding for public services. IRS Publication 526 says that taxpayers can’t deduct as a charitable contribution any payment for which they receive a benefit in return.
In January, the New Jersey Policy Perspective issued a short report arguing that policy changes to avoid the SALT deduction cap would increase income inequality in the state.
Senate Republicans on the Senate Budget & Appropriations Committee also criticized the measure in a statement Feb. 15, saying it failed to address underlying tax problems that drive up property taxes in the state.
Sen. Anthony Bucco (R), the Senate Republican Budget Officer, called the plan to mask property tax payments as charitable contributions “a thinly veiled tax evasion scheme.”
“Anyone who thinks the IRS won’t tear this plan apart is kidding themselves,” Bucco said in a statement and a tweet. “New Jersey taxpayers need real solutions that won’t put them on the wrong side of the law.”
Separately, the Senate Budget & Appropriations Committee considered a bill that would offer property tax relief by facilitating better cost-sharing among local governments and school districts.
S.B. 1, sponsored by Senate President Steve Sweeney (D), would amend and repeal various statutes to make it easier for municipalities, school districts, fire districts, and other local entities to share services.
New Jersey has 565 different municipalities and nearly 600 public school districts, the New Jersey Business & Industry Association (NJBIA) said in a statement it issued Feb. 15 supporting the bill.
“State and local property taxes make up over 40 percent of the taxes paid by businesses in New Jersey, which is why controlling property taxes is an important issue for business owners as well as homeowners,” NJBIA Vice President Andrew Musick said in a statement.
Also forwarded out of committee Feb. 15: S.B. 57, which would establish a rainy day fund for property tax relief programs, and S.B. 878, which would prevent the governor from unilaterally withdrawing from reciprocal tax agreements made with other states.
With assistance from Kaustuv Basu in Washington
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