Will federal changes force New Jersey to 'blow up' tax system?

Neal Rochford is used to hearing that his neighbors in Haddonfield are thinking of leaving town after their children finish school.

"It's a shame, because we lose quality people," said Rochford, the mayor of the South Jersey borough, which has an average property tax bill of more than $14,000 — more than half of which goes to the school district.

Now that the new federal tax law is in effect, Rochford said, he expects more people may move away.

New Jersey is among the states hit hardest by the new federal tax law's $10,000 cap on state and local deductions. "It's just like one more nail in the coffin," Rochford said.

Unless, of course, something changes. Federal tax reform has caused lawmakers in New Jersey — which has the highest property taxes in the nation, with an average bill of more than $8,000 — to rethink the system. Some say this year is the time for drastic change.

"We're going to look at everything," Senate President Stephen Sweeney (D., Gloucester) said on Fox News this month. "And we pretty much have to blow the system up and start over."

Sweeney has convened a bipartisan team of senators and economists to "not only examine the impact of the federal tax law, but also to undertake a long-overdue assessment of our tax system," he said in a statement Friday.

The added pressure to provide relief to taxpayers comes as Gov. Murphy takes office with a list of campaign promises that would increase state spending. Murphy, a Democrat, joined other governors Friday to announce plans to sue the federal government over tax reform, and said he is pursuing other options to work around the new law. But he also campaigned on a promise to tax millionaires and a pledge to fully fund schools – an initiative that would cost at least $1 billion per year.

The federal law creates "a significant complication" for Murphy's campaign promises, said Marc Pfeiffer, assistant director of the Bloustein Local Government Research Center at Rutgers University. "I'm not sure how he solves that particular problem."

Other high-tax states are also considering their options. New York Gov. Andrew Cuomo has proposed swapping the state's income tax on workers for a payroll tax paid by companies. In New Jersey, it is unclear what a restructuring of the tax system would look like or if it is a realistic goal.

"There's a political-level response that gets made, but when you start getting into the weeds of dealing with what is in fact an obligation on property owners or taxpayers, that schools or counties or municipalities need their funding, there are some interesting challenges," Pfeiffer said.

Pfeiffer said workaround plans — such as one proposed by three North Jersey boroughs and supported by Murphy, to establish charitable foundations through which residents could make deductible donations and receive tax credits in return — would likely face scrutiny from the IRS.

Sweeney said that tax reform will have a "devastating effect" on New Jersey, but that his task force will look for a broader overhaul — not just a way to skirt federal changes.

He has long advocated reducing taxes by sharing services among municipalities. That's a plan the New Jersey Society of Certified Public Accountants supports. CEO Ralph Thomas said New Jersey might also look to other states that operate more efficiently or have a smaller number of school districts relative to the population.

"How are they able to operate in a manner that we don't seem to be able to operate?" Thomas said. "I think those are the deep questions that we think that the administration and lawmakers should be asking and delving into."

Sweeney has also backed off of his commitment to Murphy's campaign promise of a tax on millionaires.

"We need to have a sophisticated understanding of the impact before we consider any tax increases and before we pass our next state budget," he said. "We need to undertake a long-overdue examination of the adequacy, fairness and competitiveness of our tax structure.

"This is something that right after my election I said we're moving full steam ahead with," Sweeney said on Fox News. "And then I said, well, wait a minute, I never dreamed what was going to happen in Washington happened, and now we have to look at how we fund our schools, how we tax. There's plenty of money in the state of New Jersey going into taxes, we're just not spending it right."

Murphy, in a conference call with reporters Friday, did not promote any one plan for state tax changes but said he found Cuomo's ideas about payroll taxes "quite compelling" and promised to pursue every possible option.

With Murphy in office, Democrats have full control of New Jersey government. But Republicans "don't see where that money is going to come from" to fulfill Murphy's campaign promises, said Brad Schnure, communications director for New Jersey Senate Republicans.

Senate Republicans have their own ideas to relieve taxpayers. Sen. Joe Pennacchio (R., Morris) proposed eliminating the cap on property tax payments that can be deducted from state income tax bills. That deduction is currently capped at $10,000. Former Gov. Chris Christie said in December that it would cost the state about $150 million a year.

"Making New Jersey more affordable was already a top priority, even before the Trump tax scheme unfairly and directly targeted New Jersey," Assembly Speaker Craig Coughlin (D., Middlesex) said in a statement Thursday. "We're reviewing all options … and look forward to a thorough review of the governor's budget proposal in the coming months."

Finding workarounds to federal law "should only be a part of a more comprehensive state-level response to the federal law that includes raising new revenue," Sheila Reynertson, a senior policy analyst for the progressive think tank New Jersey Policy Perspective, warned in a statement last week.

The extent of the new tax law's impact was clear in December, as thousands rushed to wait in line at municipal offices to prepay 2018 taxes before the new law took effect. But an advisory from the IRS that limited deductions on prepaid taxes further complicated the prepayment frenzy.

Two congressmen from New Jersey — Leonard Lance (R., Hunterdon) and Josh Gottheimer (D., Bergen) — introduced legislation this week that would allow taxpayers to deduct all prepayments.

Prepayments will also cause confusion for state tax deductions, as residents can only deduct payments in the year that taxes are due. Assemblyman Roy Freiman (D., Somerset) has proposed allowing residents to deduct their prepaid taxes, along with a one-time doubling of the $10,000 cap on state deductions to cover prepayments.

But, he acknowledged, "this doesn't fix the challenges we have in New Jersey at all."

For Sweeney, the federal changes are an opportunity to face those challenges.

"We need to find ways to make New Jersey more competitive," he said. "This is no small task. But it is the responsible thing to do to react to current realities and to plan for the future."