NJ Lawmakers Begin Debating Workaround For SALT Cap In Federal Tax Law

The measure is considered a workaround for the new federal tax law’s $10,000 cap on the state and local taxes deduction, also known as SALT, which has come under fire in New Jersey and other high tax states because it limits how much residents can write off from their state income taxes and property taxes.

TRENTON — New Jersey lawmakers have taken their first step toward approving legislation which makes clear that towns, school districts and counties are permitted to create charitable funds and property tax credits as a potential workaround to the new federal tax law.

Questions still remain about the concept, though, primarily from lawmakers concerned that the IRS will not allow taxpayers to deduct what they contribute to local governments.

It’s also unclear if any Burlington County towns will move forward with creating the funds and tax credits.

The legislation advanced Thursday from the Senate Budget and Appropriations Committee by a 9-1 vote, after being introduced the same day by Sen. Paul Sarlo, D-36th of Wood-Ridge, and Senate President Stephen Sweeney, D-3rd of West Deptford.

The bill specifies that local governments and counties can establish the charitable funds for “specific public purposes” such as police, education programs or other services. It also specifies that those governments can offer property tax credits, equal to 90 percent of what is contributed, although it also says the state Department of Community Affairs could potentially change that percentage each year.

The measure is considered a workaround to the federal tax law’s $10,000 cap on the state and local tax deduction, known as SALT, which has come under fire in New Jersey and other high-taxed states because it limits how much residents can write off from their income and property taxes.

Since a deduction for charitable contributions remains part of the federal tax code, supporters believe New Jersey residents will be able to donate to the new charitable funds and write off the contributions on their federal taxes.

Gov. Phil Murphy has endorsed the idea and is publicly encouraging mayors to implement it as a way to protect residents from potential federal tax increases due to the loss of the full deduction. Murphy also called on legislators to quickly approve legislation spelling out the finer points of the proposed funds and credits.

“It’s not a Democratic or Republican imperative. It’s doing right by our citizens,” Murphy said during a speech earlier this month at a meeting of the New Jersey Conference of Mayors.

Sarlo, who chairs the Senate Budget and Appropriations Committee, said the measure would provide some interim relief for taxpayers while lawmakers conduct a wider examination of the state’s system of taxation and government spending.

“I’m not saying by any means this is a long-term solution for tax policy in the state of New Jersey,” Sarlo said. “But we need to do something to defend ourselves in the interim.”

Two Republicans on the committee, Sens. Steve Oroho and Sam Thompson, said they agreed that residents should be permitted to deduct all their state and local taxes, but they expressed concerns that the IRS might not allow residents’ contributions to local governments to be written off as “charity.”

“The IRS has already indicated there’s going to be an issue about this,” said Oroho, R-24th of Franklin. “It’s going to be a very difficult argument to make.”

Thompson, R-12th of Old Bridge, was also skeptical. “I’m not at all optimistic the IRS will go along with this procedure,” he said.

Sarlo countered that similar programs have been created in other states to allow contributions toward all manner of government services and programs, including road construction, land conservation, college scholarships, private school vouchers, food banks and other services for the poor.

Other lawmakers stressed that the legislation would be “permissive,” and that towns would not be required to create charitable funds or tax credits, nor would residents have to contribute to them.

Sen. Troy Singleton, D-7th of Palmyra, had doubts about the measure but said it was important to raise the issue and for residents to know their representatives are looking for solutions.

“We’re not going to just sit idly by,” Singleton said. “We have to send a message to our taxpayers.”

Gordon MacInnes, a former state senator and president of New Jersey Policy Perspective, a left-leaning think tank, questioned why lawmakers were rushing to enact a workaround that would largely benefit wealthy homeowners. While close to 40 percent of New Jerseyans have claimed the deduction in the past, he predicted that many would now opt to itemize due to the tax law’s larger standard deduction, and said that only the wealthiest would have homes with property taxes above $10,000.

“This is not going to be a benefit for most of us living in New Jersey,” he said.

Sarlo disagreed. He said many middle-class families pay more than $10,000 in annual property taxes and could benefit.

It’s still unclear if any Burlington County towns are interested in the idea of creating charitable funds and tax credits. Several New Jersey mayors have appeared with Murphy at news conferences where he spoke in favor of the workaround, but none were from Burlington County.

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