NJ suing Trump administration (again) over tax law

New Jersey and two of its neighbors are again suing the Trump administration in connection with the 2017 federal tax changes, this time over an IRS rule that neuters the charitable workaround the states concocted to preserve deductions for taxpayers.

It marks the second straight July 17 that New Jersey, New York and Connecticut have sued in connection with the state and local tax, or SALT, deduction. Last year, they were joined by Maryland in challenging the constitutionality of the law’s new $10,000 cap on such deductions.

This time, the three states have sued over an Internal Revenue Service rule finalized last month that prevents people from obtaining a full charitable deduction if they contribute to new charities created by local governments that provide property tax credits in return for those payments.

Gov. Phil Murphy and Attorney General Gurbir Grewal, in announcing the federal lawsuit at a South Orange firehouse, said 33 states have developed over 100 charitable contributions programs but that the IRS punitively moved to change a century of precedent to block the new local government charities.

Murphy said “New Jersey is not looking for special treatment for its taxpayers.”

“Our actions were perfectly legal under both the federal tax code and long-established IRS practices,” Murphy said. “But for the sake of pure politics and the further weaponization of the tax code, the IRS has decided to change its policy to countermand nearly 35 years of established legal precedent.”

“The action by the IRS is completely and utterly unlawful and against any precedent it itself had taken,” Murphy said. “And it is particularly harmful to the state of New Jersey.”

Grewal said Treasury Secretary Steven Mnuchin has said the SALT cap was designed to pressure states like New Jersey to change their tax policies.

“This is yet another unfair attack on our states coming out of Washington,” Grewal said.

The lawsuit, filed in New York, cites 1985 and 1988 court and IRS rulings that said a donor’s right to claim a full federal charitable deduction isn’t disallowed even if the donation was made to obtain a tax benefit.

“Every argument that we make in this complaint and that we will make in court is an argument that the IRS has supported in the past,” Grewal said. “Again, that’s why I said there is nothing novel or unique or new about what we’re saying here.”

“We’re going to rely on their own decades-long, if not over a century-long, reasoning and rationale to argue our case,” Murphy said. “So I would just say we’re on the side of sanity.”

Republicans said the lawsuit does little to address the problem of property taxes in New Jersey.

“When we say we want honest answers to real problems, this lawsuit is exactly what we are NOT talking about,” said Republican Party state chairman Doug Steinhardt. “… This lawsuit is a political stunt and another waste of taxpayer money.”

Nearly 42% of New Jersey taxpayers deducted their state and local income taxes in 2016, averaging $18,092 per deduction, according to IRS data analyzed by the Tax Policy Center. That is now capped at $10,000.

“That’s outrageous,” said Assemblyman John McKeon, D-Essex. “It’s unfair, particularly given the fact that we’re a donor state with 71 cents coming back to us of the dollar that we all send to the federal government.”

“If you think that this is just, ‘Oh, this is a rich man problem, a rich person problem,’ it’s not,” said Assemblyman Roy Freiman, D-Somerset. “Those that make between $75,000 and $100,000, 65% of those were impacted by this change – 65% of those taxpayers. This is not worrying about the uber-wealthy. This is middle class that are impacted (by) this every day.”

New Jersey: Decoded cuts through the cruft and gets to what matters in New Jersey news and politics. Follow on Facebook and Twitter.

Michael Symons is State House bureau chief for New Jersey 101.5 and the editor of New Jersey: Decoded. Follow @NJDecoded on Twitter and Facebook. Contact him at michael.symons@townsquaremedia.com