SOUTH ORANGE, NJ — Gov. Phil Murphy and Attorney Gen. Gurbir S. Grewal announced at a July 17 press conference at the South Orange Fire Department that New Jersey has filed a federal lawsuit against the Internal Revenue Service and the U.S. Treasury Department, in an attempt to protect state taxpayers from what the Murphy administration called “the Trump administration’s repeated efforts to unfairly target them.”
Filed in the U.S. District Court for the Southern District of New York, the lawsuit seeks to strike down a new IRS rule that would prevent New Jersey residents from obtaining a full federal charitable deduction whenever they contribute to local governments and other qualifying institutions and receive tax credits in return, a practice commonly known as SALT. New York and Connecticut have joined the lawsuit.
South Orange Village President Sheena Collum kicked off the event, introducing Murphy and describing how instituting a SALT cap would negatively impact South Orange and Maplewood.
“The SALT cap has disproportionately impacted communities such as South Orange, such as Maplewood, a lot of northern New Jersey towns that are home to amazing train stations and transit-oriented development,” Collum said. “So this is hitting us hard. Mostly it’s hitting us hard because of our commitment to equity,” she continued, adding that not everyone in South Orange is wealthy, and many residents are “middle class or the working poor.”
Collum said that SALT deductions will be even more important to the SOMA community in the coming years, thanks to the recently approved Long Range Facilities Plan for nearly $170 million for the South Orange-Maplewood School District.
“These two communities of both South Orange and Maplewood were very proud to just pass a $170 million bond to invest in our students, in our schools, in our teachers,” she said, adding that currently the average South Orange homeowner pays $18,000 per year in taxes, but that in three years that number will be closer to $20,000. “With close to 10 percent of our population being 65 years or older, what we’re seeing is a flight — a massive flight — of our senior citizens and that is not sustainable for a community that wants to celebrate its demographics.”
Also in attendance at the press conference were Maplewood Mayor Vic DeLuca, Deputy Mayor Frank McGehee, and Township Committee members Dean Dafis and Nancy Adams; South Orange Trustees Walter Clarke and Donna Coallier; South Orange-Maplewood Board of Education President Annemarie Maini and member Shannon Cuttle; and Assemblyman John McKeon, who represents the 27th Legislative District, which includes Maplewood, South Orange and West Orange, among other municipalities.
McKeon said that approximately 50 percent of the households in New Jersey take a SALT deduction and that capping it is “unfair.” He also called out U.S. Secretary of the Treasury Steven Mnuchin.
“One of my favorite quotes of his was when he was asked about the $16 billion that this was going to impact really around the whole nation,” McKeon said. “He said, ‘Come on, Mayor, just cut your budgets.’ Why don’t we undo this great education system here in South Orange-Maplewood? Why don’t we cut down on public safety relative to the great firefighters and police that are here, Vic? Outrageous.”
Back in 2017, the federal government enacted a tax overhaul that placed, for the first time, a $10,000 cap on the federal deduction for state and local taxes. The SALT cap disproportionately harmed taxpayers in New Jersey, Connecticut and New York, according to the Murphy administration. At the time, Mnuchin — who was named as the defendant in the lawsuit — confirmed that the SALT deduction cap was intended to “send a message” to states like New Jersey that they would need to change their tax policies.
In May 2018, Murphy signed S1893/A3499 into law, which allowed residents to make charitable contributions to qualifying local institutions, and to receive partial tax credits of up to 90 percent against their local property tax bills when they did so.
According to Murphy, at least 33 states have developed more than 100 charitable contributions programs similar to New Jersey’s, and the IRS consistently treated charitable contributions made pursuant to these programs as fully deductible under federal tax law. But when New Jersey, New York and Connecticut decided to establish such programs, the IRS issued a new rule aimed at nullifying it. The final rule requires taxpayers to subtract the value of any state and local tax credits they receive for charitable giving from their federal charitable contribution deduction.
“This is not a fight we asked for, but it is one we are proud to wage on behalf of our taxpayers, and the countless others in our fellow states who are realizing now that they are financial collateral damage to the Trump administration’s rank politicization of the tax code,” Murphy said. “We are committed to fighting Washington to end this unfair and unconstitutional tax on New Jersey’s taxpayers.”
“Our message to the IRS today is simple. No matter how many times you change your rules — from capping the SALT deduction to reversing your longstanding approach to charitable donations — we will challenge you in court,” Grewal said. “Our residents already pay more to the federal government than we get in return. That is why I remain committed to standing up for New Jersey taxpayers in the face of this onslaught coming out of Washington.”
This New Jersey-led lawsuit describes the IRS action as a “radical break” from historic precedent, and describes its rule regarding SALT as arbitrary, outside the agency’s statutory authority and a violation of the federal Administrative Procedures Act.
In addition to being unlawful, the complaint asserts, the rule threatens economic harm to New Jersey and other states by discouraging charitable giving, and by depriving such local entities as school districts, municipalities and counties of important funding.
While Mnuchin has yet to release a statement regarding the lawsuit, Republican Senate budget officer Steve Oroho advised Murphy to instead focus his energies on major property tax relief.
“The lawsuit announced today does very little to address that,” Oroho said. “The better approach would be to fix the state’s underlying tax problems that make the SALT limitation an issue.”