Gov. Phil Murphy announced New Jersey was filing a lawsuit seeking to overturn an Internal Revenue Service rule that blocked the state’s attempt to circumvent the $10,000 cap on state and local tax deduction imposed by the tax plan passed by congressional Republicans in 2017.
“As I’ve said many times, New Jersey is not looking for special treatment for its taxpayers,” Murphy said. “We’re just looking for equal treatment with 33 other states, which have implemented nearly 100 programs allowing residents to make charitable contributions in exchange for tax relief, programs which the IRS until just last year affirmed.”
The suit, filed jointly by New Jersey, New York and Connecticut in a New York federal court, is an attempt to combat what Murphy and lawmakers in the other two states say is a crackdown on blue states where lawmakers have been critical of President Donald Trump.
U.S. Treasury Secretary Steven Mnuchin, who is named as a defendant in the suit, once said the cap was intended to “send a message to the state governments that, perhaps, they should try to get their own budgets in line.”
“He said, ‘Come one, mayor, just cut your budget,’ Why don’t we undo the great education here in South Orange-Maplewood? Why don’t we cut down on public safety relative to the great firefighters and police that are here?” Assemblyman John McKeon said. “Outrageous.”
New Jersey’s workaround, which Murphy signed into law in May, would provide municipalities with the ability to classify most property tax payments as charitable contributions, which can be deducted from federal tax bills independent of the SALT cap.
Further, Attorney General said workarounds in other states, mainly those in red ones, have been left untouched by the IRS.
“These tax credit programs were just fine when 33 states had them, but when New Jersey, New York and Connecticut followed suit, the IRS adopted brand new rules to shut them down,” Grewal said. “So today, we’re responding with this lawsuit, and our claims are very straightforward: When it makes new rules, the IRS must follow two basic requirements. First, it has to follow the language of the tax code, and second, it has to act in ways that are rational and well-reasoned.”
Grewal said the IRS did neither in this case.
Republicans have shown little love for SALT cap, but though it passed the Senate 29-9 and sailed through the Assembly 69-0, the some of the state’s Republican leaders have eyed the workaround skeptically.
“When we say we want honest answers to real problems, this lawsuit is exactly what we are NOT talking about. If Phil Murphy really cared about the infamous property tax burden that all New Jersey families carry, he would have addressed it in any of his budgets or through legislation in Trenton. He has raised taxes and increased spending at every turn,” Republican State Chairman Doug Steinhardt said. “This lawsuit is a political stunt and another waste of taxpayer money.”
It’s worth noting that Assembly Minority Leader Jon Bramnick voted to in favor of the bill when it was on the Assembly floor, as did most of the Assembly Republican caucus.
Though, some members that voted against the workaround initially shared the chairman’s view.
“New Jersey homeowners are the most overtaxed residents in the United States,” State Sen. Steve Oroho said. “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. Governor Murphy can help make the Garden State more competitive and accomplish real savings for taxpayers by getting behind the Path to Progress reforms that have bipartisan support in the Legislature.”
The SALT cap hits blue states with higher property values, like New Jersey, particularly hard and leaves lower-tax red states largely untouched.
Because blue states also tend to be wealthier and pay out more than they receive in federal taxes, some lawmakers in the state see the $10,000 cap as a jab by Trump against states that didn’t back him during the or after the 2016 election.
New Jersey’s entire congressional delegation has pushed against the SALT caps at one point or another, and they aren’t letting up.
“Attorney General Grewal’s lawsuit today was exactly the right action to fight back against a regulatory overreach by the IRS that is, once again, raising taxes on New Jersey residents and other Blue States — and giving big tax breaks, yet again, to Red States,” said Rep. Josh Gottheimer, who last month introduced a resolution to rescind the IRS rule blocking New Jersey’s workaround.