While a plethora of states have made changes to their laws in the wake of Pub. L. No. 115-97, it seems that few states in the nation are making more waves regarding their responses to the impacts of federal tax reform than New Jersey. When Gov. Phil Murphy (D) released his proposed budget for fiscal year 2019 on March 13, 2018, he continued the trend.
FY 2019 Budget Plans
As background, Pub. L. No. 115-97 eliminates the federal deduction for state and local income taxes, as well as limiting the deduction for property taxes to $10,000. These changes are sure to be felt in New Jersey, where residents paid the highest property taxes in the nation last year, averaging $8,690 per property, in addition to the state boasting one of the highest individual income tax rates in the nation, per Bloomberg’s Elise Young.
Even with these potential concerns, Murphy recently proposed a record $37.4 billion in spending in FY19, bolstered by an additional $1.5 billion in new tax revenue.
Many throughout the state are leery, however, due to the sources of the state’s new revenue.
Murphy’s budget plan depends on increasing the sales tax rate to seven percent; legalizing and taxing recreational marijuana; and, perhaps most notably, a “millionaire’s tax,” which would increase the marginal tax rate applied to income above $1 million to 10.75 percent and generate an estimated $765 million in additional revenue for FY19. As explained by Moody’s analyst Baye Larsen, however, New Jersey’s proposed tax increases “‘will feel more costly to taxpayers’” because of Pub. L. No. 115-97’s changes to the state and local income tax deductions, as well its limitation on property tax deductions.
Given the New Jersey Senate, General Assembly, and governorship are all Democratically-controlled, it seems inevitable that a final compromise will be reached, though on March 22, 2018, Murphy conceded, “[t]here’s a long way to go.”
Other State Developments
In addition to New Jersey, there are several more recent developments at the state level as a result of the federal tax act.
Florida Conforms to the I.R.C.
On March 23, 2018, Gov. Rick Scott (R) signed H.B. 7093, updating the state’s conformity with the Internal Revenue Code from the version in effect on Jan. 1, 2017, to the version in effect on Jan. 1, 2018, thereby generally adopting the language of Pub. L. No. 115-97. This new law is retroactive to Jan. 1, 2018.
Illinois Property Tax Deductions
On March 27, 2018, the U.S. Department of the Treasury responded to a letter from Illinois Rep. Peter Roskam (R) on whether property tax payments made by Illinois residents in 2017 could be deducted on their federal tax returns. The department noted that taxpayers could deduct these payments from their federal returns. However, this is because property taxes in Illinois are billed in arrears—generally meaning that taxpayers’ prepayments made at the end of 2017 were, in fact, prepayments of 2017 property taxes rather than prepayments of 2018 property taxes, as is commonplace throughout the rest of the nation.
Minnesota Requests Guidance
On March 28, 2018, Minnesota’s Revenue Commissioner, Cynthia Bauerly, sent a letter on behalf of Minnesota’s taxpayers seeking guidance on whether Minnesotans who prepaid 2018 state and local property taxes in 2017 can deduct those payments on their federal income tax returns this year. Commissioner Bauerly specifically noted that the IRS’ Dec. 27, 2017, Advisory does not adequately address Minnesota law, as Minnesota’s taxes begin with federal taxable income, which would be affected by the IRS’ decision on whether to allow the proposed deduction.
As evidenced by these recent developments, there will surely be more state-level impacts and updates due to federal tax reform. Be sure to follow Bloomberg BNA’s products to remain up-to-date on the impacts of Pub. L. No. 115-97 in these states and throughout the entire nation.
Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: What do you think of New Jersey’s response to federal tax reform?
For more information on the impact of Pub. L. No. 115-97, examine Bloomberg Tax’s Tax Reform Roadmap, showing detailed comparisons between pre-reform law and impending changes, with pertinent cites attached.
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