A Bergen County homeowner making $150,000 a year and owning a $600,000 house can expect to pay as much as $12,000 in property taxes and $5,000 in state income taxes.
Until 2018, taxpayers could deduct that full amount on their federal income tax returns. But Republicans capped that tax break at $10,000.
So for a married couple filing jointly in this case, it means paying as much as $1,550 more in federal taxes, according to the New Jersey Society of CPAs.
This scenario has played out across New Jersey for the past few years.
The deduction for state and local taxes, known by the acronym SALT, dates back to the Civil War and was based on the philosophy that Washington should tax the same money paid to state and local governments.
That philosophy went our the window in 2017 when then-President Donald Trump and congressional Republicans pared it down to help fund their $1.9 trillion tax cut.
With Democrats now in control of the White House and Congress, however, federal lawmakers from New Jersey and other high-tax states are using their new-found clout to force President Joe Biden to look at repealing, or at least increasing, the current $10,000 limit.
The fight for restoring the local tax breaks is now shifting into high gear, and New Jersey lawmakers in Washington say they think it can actually happen this year.
Here’s what you need to know:
The cap is hurting high-tax states like New Jersey
The deduction limit has had a disproportionate impact on New Jersey and other high-tax states. A study by Moody’s Analytics found that 16 of the 30 counties with the largest estimated percentage loss of expected home value due to the tax law were in the Garden State.
And United Van Lines’ 2020 moving survey found that New Jersey, New York, Illinois, Connecticut and California were the five states seeing the most people leaving.
Rep. Josh Gottheimer, D-5th Dist., suggested the loss of the tax deduction has encouraged wealthy taxpayers to flee New Jersey.
“As people live the state — and we know people are leaving in droves — that puts more tax burden on middle-class families who’ve got to make up the gap and it affects programs that are good for harder-pressed, lower income families,” he said.
A study by the progressive Institute on Taxation and Economic Policy found that 30% of New Jerseyans would get a tax cut if the cap was lifted — a greater percentage than any other state — and 80% of those benefitting had an average income of $216,000 or less.
Why Republicans capped the deduction in the first place.
In the words of Willie Sutton, when asked why he robbed banks, “that’s where the money is.”
The state and local deduction has been in Republican crosshairs for decades as the party sought new sources of revenue to lower taxes, especially for higher-income earners.
Then-President Ronald Reagan failed to eliminate it entirely in his 1986 tax overhaul, but Congress temporarily did away with the deduction for state and local sales taxes.
In this case, the revenue from limiting the deduction to $10,000 provided much of the money needed to fund a tax cut that independent studies said gave most of its benefits to the wealthy and corporations.
The fact that the curtailed tax break would fall heaviest on Democratic-run states wasn’t lost on the Republicans either.
A separate Institute on Taxation and Economic Policy study found that the tax bill increased the share of personal income taxes paid to the federal government by residents of six states: New Jersey, New York, California, Connecticut, Maryland and Massachusetts. All have two Democratic U.S. senators and Democratic-controlled state legislatures.
“Republicans specifically targeted our states in 2017 and they bragged about it,” said Rep. Bill Pascrell Jr., D-9th Dist. a member of the House Ways and Means Committee.
Annual studies by the State University of New York’s Rockefeller Institute of Government and New York State Comptroller Thomas DiNapoli showed that taxpayers in New Jersey and New York are the ones subsidizing Republican-led states, even with the state and local tax deduction.
Kentucky, home of Senate Republican Leader Mitch McConnell, who championed the 2017 tax law, received $63 billion more in 2019 from Washington than it paid in taxes. Texas got more than $19 billion. Florida, almost $51 billion.
On the other hand, New Jersey received $10 billion less while New York got almost $23 billion less.
Why lawmakers feel they can actually restore the tax break now
Congressional supporters on Thursday formed a new caucus to push for repeal of the cap.
The founding members came from New Jersey, New York (home of Senate Majority Leader Chuck Schumer), Illinois (home of Senate Majority Whip Dick Durbin), California (home of House Speaker Nancy Pelosi) and Maryland (home of House Majority Leader Steny Hoyer). Those four are the most powerful members of Congress.
There’s also strength in numbers: The 32 original members of the Congressional SALT Caucus are enough to sink Biden’s taxing and spending proposals, including his $2 trillion infrastructure plan, if calls to modify the $10,000 cap are ignored.
“This has to be part of the conversation,” said Rep. Thomas Suozzi, D-N.Y., a co-chair of the new caucus.
Their argument in three words: Helping middle class.
“That’s why we launched the SALT caucus, to make the case to our members and explain to our colleagues that this affects middle-class families in places where we live and it affects harder- pressed families as well,” Gottheimer said.
“That’s the way we’re going to win. You’re going to win, member by member here, making the case, getting the facts out.”
Before the 2017 tax law, more than 40% of New Jerseyans took advantage of the state and local tax deduction, behind only Maryland and Connecticut, according to the Tax Foundation, a research group whose board includes two former House Republicans.
“It’s the young couple trying to buy their first house in New Jersey and getting sticker shock because of the repeal of SALT,” said Rep. Tom Malinowski, D-7th Dist. “It’s the retired couple who wants to stay close to their grandchildren and not have to move out of state.”
Here’s what a final deal could look like.
In arguing the keep the cap, Republicans say the rich benefit by the deduction.
“Those middle-class workers, those teachers, police and firemen, they don’t itemize their deductions,” said Rep. Kevin Brady of Texas, the top Republican on the tax-writing House Ways and Means Committee and chief sponsor of the 2017 tax law. “What about all those other Americans who don’t live in those high-tax states. Why should low-income, middle-income taxpayers subsidize the wealthy?”
“They should rename that caucus, ‘the tax breaks for millionaires caucus,” he said..
According to the Joint Committee on Taxation, 61% of those who would benefit by repealing the cap earn more than $200,000 and 52% of the tax break would go to those making more than $1 million.
But at the same time, 66% of those taking the deduction in 2019 earned less than $200,000, which in high-cost states like New Jersey is middle class, according to the committee.
Still, the idea of keeping some deduction limit for higher income earners is on the table.
Some have suggested raising but not eliminating the $10,000 cap. Just raising it to $24,000 for married couples, as Rep. Mikie Sherrill, D-11th Dist., once proposed in bipartisan legislation, would provide tax relief for plenty of middle-class homeowners.
Even some opponents of full repeal, such as Rep. Alexandria Ocasio-Cortez, D-N.Y., acknowledged that some adjustments were warranted.
“There’s a conversation to be had, I think, about the cap itself, and at what level it’s appropriate, and where we can help families that are really deeply impacted — because there is a disproportionate impact in blue states and coastal states,” she said.
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Jonathan D. Salant may be reached at jsalant@njadvancemedia.com. Follow him at @JDSalant.
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