New Jersey's Murphy Joins Fight Against Tax Deduction Cap

New Jersey’s governor-elect joined a chorus of leaders in Democratic states who are proposing workarounds for their residents to avoid new caps on state and local tax deductions -- even as a top Trump administration official suggested the federal government might act to limit such strategies.

Phil Murphy, a Democrat who will be sworn in as New Jersey’s governor on Jan. 16, said Friday he’s working on a plan that would effectively convert property taxes into charitable gifts. Murphy joins New York Governor Andrew Cuomo and California Senate President Pro Tem Kevin de León, who have also said they’re considering ways to shield their constituents from a new $10,000 federal cap on state and local tax deductions.

Murphy’s announcement came just hours after White House economic adviser Gary Cohn said the Trump administration may try to block any potential avoidance strategies by high-tax states.

“I understand what they’re trying to do for their cities and their states and their taxpayers,” said Cohn, director of the National Economic Council, during a Bloomberg Television interview Friday. “We at the federal government still have to collect revenue.”

The state actions and Cohn’s response suggest a looming showdown or the beginning of a cat-and-mouse game between state and federal policy makers, experts said.

Before the Republican Congress’s tax overhaul took effect Jan. 1, most filers could deduct state and local taxes from their federal returns, a benefit that applied to property, income, and other levies. But the new law that President Donald Trump signed last month caps the so-called SALT deduction at $10,000, a change that could cost residents of high-tax states billions of dollars.

Prepaying Property Taxes

A precursor to tension between the federal government and states first emerged at the end of December over the prepayment of state and local property taxes. Some officials in states including New York and New Jersey encouraged homeowners to prepay their 2018 property taxes before the end of 2017 so that they could claim those deductions under the previous tax code -- without the $10,000 cap.

But the IRS issued guidance that would effectively limit or kill the prepayment benefit for millions, saying the taxes in question would have to have been assessed by local tax authorities in 2017 to qualify for deductibility on 2017 returns. Many jurisdictions hadn’t yet done such assessments for 2018 property taxes -- putting prepayments in question and stirring anger and confusion across the country.

Overall, the tax cuts that Congress approved last month are estimated to reduce federal revenue by more than $1 trillion over the next decade, after accounting for macroeconomic effects, according to the Joint Committee on Taxation, Congress’s official scorekeeper. If states devise workarounds for the $10,000 cap on state and local tax deductions, the revenue shortfall could grow.