New Jersey files suit over IRS decision blocking SALT workarounds

This article originally appeared on NJ Spotlight.

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With an average property tax bill hovering around $18,000 a year, South Orange is no stranger to the hefty price tag attached to being a New Jersey resident. Its leaders argue the community is among many disproportionately hit by the federal cap on state and local property taxes known as SALT.

“With close to 10% of our population being 65 years or older, what we’re seeing is a flight, a massive flight of our senior citizens and that is not sustainable,” said Sheena Collum, village president of South Orange.

Gov. Phil Murphy and Attorney General Gurbir Grewal on Wednesday used it as an example while announcing they’re taking on the Trump administration over the $10,000 cap residents can write off on their federal income tax bill. They filed a federal lawsuit, along with New York and Connecticut, over the IRS decision in June to block SALT workarounds.

“We’re challenging that rule as unlawful, as a violation of our federal tax code, and we’re asking the federal court in New York to strike it down,” Grewal said.

After the new federal tax rules went into effect, New Jersey passed bipartisan legislation that set up a law allowing taxpayers to shift property-tax payments to local charitable funds that could be created to support local government operations like schools, police, and fire in exchange for offsetting tax credits. It’s a complicated system, but ultimately it allowed taxpayers to make up for the loss.

“Our actions were perfectly legal under both the federal tax code and long-established IRS practices. But for the sake of pure politics and weaponization of the tax code, the IRS has decided to change its policy to countermand nearly 35 years of established legal precedent,” said Murphy.

New Jersey, a ‘donor state’

“It’s unfair, particularly in the fact that we’re a donor state with 71 cents coming back to us on the dollar, that we all send to the federal government,” said Assemblyman John McKeon (D-Union).

Meanwhile, Republican Sen. Steve Oroho (R-Sussex) called on the governor to focus his energy on major property-tax relief, while touting the Path to Progress reforms.

“The lawsuit announced today does very little to address that. The better approach would be to fix the state’s underlying tax problems that make the SALT limitation an issue,” Oroho said in a statement.

“This is real. If this were window dressing, we wouldn’t be standing here today,” Murphy said. “Last year was an increase, but it was the lowest increase on average in the state in our history. I want that small increase to be a meaningful decrease.”

Roughly 40% of the state’s property owners took a SALT deduction in 2016, before the rule change.

“Here’s our message to the IRS and Secretary [Steven] Mnuchin: No matter how many times you change the rules of the game, from capping the SALT deduction to reversing your long-standing approach to charitable deductions, we’ll challenge you in court and we will hold you accountable,” Grewal said.

Grewal said at least 33 other states have used roughly 100 similar programs to work around the SALT cap. He says this is no different.

On Tuesday New Jersey’s Democratic congressional members introduced a resolution to overturn the Treasury Department’s decision to eliminate SALT workarounds.