N.J., with nation’s highest property taxes, keeps up fight over federal tax law changes

New Jersey, with the highest average property taxes in the nation, is continuing its fight against federal tax changes that capped the deductions for state and local tax payments.

New Jersey Attorney General Gurbir S. Grewal, along with the attorneys general of Connecticut and New York, filed a lawsuit Wednesday against the IRS and Treasury Secretary Steven Mnuchin, challenging a new IRS rule that took effect last month.

The IRS rule blocks New Jersey from using charitable contributions as a workaround to federal tax payments; the state Legislature passed a law last year that would allow municipalities and school districts to establish charitable foundations to which residents could essentially make charitable contributions in lieu of tax payments and claim the contributions as federal tax deductions.

“We’re challenging that rule as unlawful, as a violation of our tax code,” Grewal said at a news conference in South Orange, N.J.

In a survey of 500 accountants conducted by the New Jersey Society of Certified Public Accountants, 36 percent said the new federal tax law that took effect in 2018 increased individuals’ and families’ tax liability; about 44 percent said the changes decreased tax liability; and 20 percent said taxes stayed the same.

Close to 60 percent said the tax changes, including the new $10,000 cap on state and local tax (SALT) deductions, made them “somewhat” or “definitely” more likely to advise clients to leave New Jersey, while 41 percent said they did “not at all” advise more clients to leave the state.

About half of households use the SALT deduction, New Jersey officials said at Wednesday’s news conference, and the average property tax payment for those that use it is almost $18,000.

New Jersey is estimated to have the most residents of any state who had increases as a result of the 2018 tax law changes, Nicole Kaeding, vice president of federal and special projects at the Tax Foundation, testified at a House hearing on the SALT deduction last month. Just over 10 percent of New Jersey residents had higher tax bills, she said, while an estimated 62 percent had decreases, by an average of $2,740.

Berks County (Pa.) Commissioner Christian Leinbach also testified at that June hearing on behalf of the National Association of Counties. He argued that the SALT deduction cap impacts middle- class taxpayers; the average SALT deduction in his county was more than $10,000 in 2016, he said, and more than 90 percent of residents who claimed the SALT deduction made less than $200,000 annually.

Gov. Phil Murphy said he believes the changes target Democratic-led states like New Jersey, especially because the charitable contribution rules were in use by 33 states but were not changed until New Jersey and other states wanted to use charitable contribution credits as a workaround to the SALT deduction cap.

“I’m hopeful the courts will agree and that we will invalidate the IRS rule,” Murphy said Wednesday.

State Sen. Steven Oroho (R., Sussex) criticized the lawsuit as “mere window dressing” because it does nothing to address the issues behind the state’s high property taxes. Oroho co-chaired a bipartisan group that recommended cost-saving changes in a “Path to Progress” report.

“Addressing the real cost drivers to government, mainly the exploding expenses of pensions and benefits, would lead to significant savings for New Jersey homeowners,” Oroho said in a news release. “I urge the governor to get behind the fiscal reforms proposed by the legislature as the best way to relieve the burden on overtaxed Garden State families.”

Murphy said lawmakers and state officials also are working to reduce the state’s property taxes, calling it “a crisis” and citing efforts to have towns share services.

“We can walk and chew gum at the same time,” he added, saying that fighting the IRS was not the only action the state is taking to deal with property tax problems. “This is one of a number of steps that we have pursued.”