Last year’s Republican Tax Act placed a $10,000 cap on formerly unlimited state and local tax deductions for income, sales, and property taxes. Deductions on income and sales taxes previously allowed many high-tax state residents to pay less in taxes. Faced with this new cap, some high-income residents of New Jersey are projected to experience considerable tax hikes.
In response, Democratic Gov. Phil Murphy has proposed that the state legislature allow municipalities to establish charitable funds to which homeowners could pay their annual levy. Theoretically, tax credits would therefore be extended to residents that give money to the fund, thus cancelling out the projected tax hikes under the new plan.
As of the time of publication, the New Jersey Senate has voted 28–9 in support of the motion, but the bill has yet to be approved by the Assembly and sent to the governor’s desk.
At a Princeton town hall meeting, Liz Lempert, the mayor of Princeton, along with council members Heather Howard and David Cohen, all Democrats, shared their impressions.
Lempert, who had attended a New Jersey conference of mayors in Trenton, claimed that there had been some pushback from the state legislators to the idea, and that the Internal Revenue Service wouldn’t necessarily allow its implementation. She also noted that authorization of such a motion at state and federal levels would take a long time.
“It’s a long shot,” agreed Howard, who said that no resources were being spent on it now, but that the council would act in case of encouraging developments. “The past bill was a severe burden for a lot of people, we want to provide whatever relief we’re allowed to provide,” she added.
“Strategically, as a form of civil disobedience, states might want to implement this idea to force the IRS to expand resources to fight it,” Cohen suggested.
“We’re watching and waiting,” Lempert said in an interview with the ‘Prince.’ “The tax bill hit Princeton residents disproportionately, but we’re cautious not to give false hope, as we still need the state Legislature’s authorization.”
Lempert added that IRS first needs to recognize the motion if there’s to be any further development.
Andrew Sidamon-Eristoff, a Republican lawyer who previously served as N.J. state treasurer from 2010 until 2015, expressed his doubts about the proposal.
“As a former tax lawyer, and a long time government tax administrator, I am very dubious about this proposed strategy,” he said. “I worry that some taxpayers will wind up taking a deduction that will be disallowed, and then face the prospect of penalties imposed by the IRS.”
Sidamon-Eristoff said he worried that the proposal risks misappropriating public funds.
“Politicians in high-tax states are going to want to look as if they’re doing something, that they’re responding to their constituents’ concerns, and I understand that,” explained Sidamon-Eristoff. “However, I think that all public officials have an obligation to represent policy options fairly and accurately, and I think it’s inappropriate to represent this as some sort of magic solution to the problem.”
As an alternative, Sidamon-Eristoff suggested eliminating the state’s $10,000 cap on state income tax deductions for property taxes, claiming it would “provide some modest mitigation” from the projected tax hikes under the new plan.