How New GOP Tax Plan Could Impact New Jersey Residents

Congress's tax reform bill that President Donald Trump is pushing would cut rates for millions. But New Jersey would still pay a hefty price because of cuts in deductions, according to details of the bill that were released Thursday.

The House Ways and Means Committee released the reform plan that would cut income tax rates, lowering the top rate to 35 percent. It also doubles the standard deduction but eliminates personal exemptions. The plan would reduce the corporate tax rate from 35 percent to 20 percent.

The plan would eliminate personal exemptions to help pay for the tax cut that some estimate could cost more than $1 trillion. Three important components of the plan could end up costing New Jersey taxpayers more:

• The bill would eliminate deductions for state income or sales taxes.
• The plan would cap the deduction for property taxes at $10,000. This element is viewed as a compromise because original tax reform plans called for doing away with the deduction entirely.
• The bill would preserve the mortgage interest deduction only for existing mortgages of up to $1 million but cap future deductions for mortgages up to only $500,000.

Analysts say it's too early to calculate a figure on how much of an increase the average taxpayer could face. A study from the Tax Policy Center says that ditching the property tax deduction for state and local taxes entirely would have cost New Jerseyans who take the exemption an extra $3,522, while Pennsylvania taxpayers would pay $2,182 more.

But elements of the current bill could impact high-income taxpayers with expensive homes and raise their rates, too, according to New Jersey Policy Perspective, a tax-policy think tank.

But New Jersey Policy Perspective said an even bigger share of the New Jersey taxpayers would be hurt by the elimination of deductions for state income and sales taxes. Forty percent of New Jersey households deduct income or sales taxes.

A total of 1.8 million New Jersey households deduct a cumulative $17 billion in state income or sales taxes from their federal taxes. At 40 percent of all taxpaying households, New Jersey ranks third highest in the nation, behind Maryland (45 percent) and Connecticut (41 percent), according to group.

Of these 1,775,740 households, the overwhelming majority (1,525,000) take the income tax deduction; the remaining 250,740 take the sales tax deduction, according to the group.

Already, at least one Republican New Jersey congressman is voicing reservations, saying eliminating the income and sales tax deductions would not be good for the state.

"The elimination of state and local income tax deductions and the $10,000 cap on property tax deductions would be detrimental to New Jersey residents," he said. "Thus this bill is not something I could support in its current form. I am working with my fellow New Jersey and New York colleagues on a counterproposal to preserve these deductions and truly make this reform a net positive for the residents of South Jersey.”

New Jersey Policy Perspective said eliminating these deductions "would make it harder for states like New Jersey to raise enough revenue to provide essential services and make public investments that benefit all residents."

"That’s because, with these deductions, higher-income filers are more willing to support state and local taxes – particularly ones, like New Jersey’s personal income tax, that are levied in a progressive manner," the group said in a statement.

Other Republicans proposed state legislation that, they say, will offset the impacts.

Assemblyman Michael Patrick Carroll announced that he plans to introduce legislation providing "significant tax relief" by permitting state residents to deduct the full amount of their property taxes from their state income taxes.

“We’ve heard much ado, recently, about a proposal to eliminate the federal deduction for state and local taxes,” observed Carroll, R-Morris. “Some of our Democratic colleagues have called that ‘double taxation’, and I agree. The state shouldn’t impose double taxation. Just as the feds should permit us to deduct our state and local taxes from our federally reported income, so too, Trenton should allow taxpayers to deduct their property taxes against our state taxable income.”

Patch file photo