New Jersey homeowners pay the highest average property-tax bills in the nation, $8,549 last year. The state also has one of the highest marginal income-tax rates, including an 8.97 percent tax on earnings over $500,000.
That would suggest residents and officials would welcome proposals to reduce taxes, such as the one Congress is working on. But the Garden State’s high tax levels would mean its more affluent taxpayers would suffer from one change being discussed.
The Trump administration has proposed offsetting various tax cuts to stimulate the economy with, among other things, the elimination of the federal deduction for state and local taxes. Annual returns to the IRS could no longer subtract from taxable income the amounts paid in property tax, state income tax and sales tax.
Since New Jersey is all about taxing residents heavily every way it can — even with a hefty gasoline tax now — the loss of the federal deduction would hit many hard.
In 2014, the average such deduction for those taking it in New Jersey was $17,200. In Pennsylvania it was $10,700 and Delaware $8,800, according to IRS data analyzed by the Urban Institute/Brookings Tax Policy Center.
Last year, the center’s economists estimated that ending the deduction would result in higher taxes on about a third of the returns from New Jersey, with an average increase on those of about $3,522.
Those averages, however, hide a very large range of effects for New Jersey taxpayers.
For starters, most state residents don’t file the federal Schedule A and itemize their deductions because their state and local taxes, combined with other deductible items such as mortgage interest and high health expenses, don’t exceed the standard deduction available to everyone. So they aren’t getting any break from the deductibility of state and local taxes, and ending it wouldn’t increase their taxes at all.
The more people spend on the deductible items, the more they save on their federal returns, so the well-off few benefit the most.
For example, in the wealthy Somerset County town of Far Hills, where the average adjusted gross income is $747,166, the average deduction for state and local taxes is $148,586, according to a NJ Spotlight analysis of 2015 IRS data.
By comparison, in Egg Harbor Township, where the average adjusted income was $56,908, the average deduction among those claiming it was $12,440.
Since most New Jersey residents get no benefit and the wealthiest among those who do get the lion’s share of the break, deductibility of state and local taxes is the kind of thing that might indeed go away in effective tax reform that simplified filing and distributed the tax burden more fairly.
This Congress isn’t that ambitious, so on its own the loss of the deduction would disproportionately hurt high-tax states such as New Jersey, New York, California and Illinois. Their political clout means that when and if a tax cut deal is done, the deduction is likely to remain. Some think it was only included in the original proposal as a bargaining chip.
But it does raise awareness of how a seeming tax break in one place can also allow, even encourage, taxes to be increased in other places. The pressure to reduce taxes in New Jersey to reasonable levels would be greater if affluent taxpayers didn’t get such a hefty break on their federal returns.