NJ joins fight against dismissal of federal SALT-cap challenge

New Jersey is joining three other states to appeal a New York federal judge’s decision to toss their legal challenge on the $10,000 federal cap on state and local property tax deductions.

Those four states – Connecticut, Maryland, New Jersey and New York – originally filed a suit in 2018 to prevent the Internal Revenue Service from enforcing the new cap, a product of the 2017 federal tax cuts.

The states argued in court that the cap was geared toward states which typically have higher property taxes, in some cases twice the cap level, in order to twist their arms politically and move toward policies the Trump administration supports.

Their arguments also allege that the Trump administration went beyond its constitutional authority, according to New Jersey General Gurbir Grewal, “when it imposed new, arbitrary limits on the amount of state and local taxes that residents could deduct on their federal tax returns.

But U.S. District Judge Paul Oetken disagreed, arguing in his Sept. 30 opinion tossing the suit that, “the states have cited no constitutional principle that would bar Congress from exercising” its power “to impose an income tax without a limitless SALT deduction.”

Oetken agreed with the assertion that because of the new federal cap, property values in those states could go down and residents would have to pay higher taxes. Oetken contended that the plaintiffs did not show how residents would directly face a financial burden because of the SALT cap, and that there is nothing in the legislation barring states from enacting policies to lower taxes.

“Today we are continuing to fight for New Jersey taxpayers in court,” Grewal said in a Tuesday statement announcing the appeal. “The federal government acted unlawfully when it imposed arbitrary and unprecedented limits on the tax deduction for state and local taxes, and it harmed residents all across our state when it did so.

Last year, Gov. Phil Murphy signed a bill that would let state residents pay most of their property taxes as charitable contributions to the towns where they reside, bypassing the SALT cap because there was no federal limit to how much taxpayers can deduct on their federal tax returns for charitable payments. But, the IRS closed the loophole and during the process, warned taxpayers not to take advantage of the proposed workaround.