President Donald Trump and Republican leaders this week unveiled a framework to overhaul federal taxes in a way that New Jersey tax experts expect will get mixed reviews from local clients.
The initial plan driving a new legislative push for tax reform involves dividing personal income tax brackets three ways instead of seven and reducing the corporate tax rate to 20 percent, down from 35 percent.
Myriad other proposals are laid out in the framework, not all of them believed to be friendly to New Jersey. But, at least when it comes to that corporate tax, Gerald Shanker, who is co-chair of KRS CPAs‘ Tax Department, said local industry leaders would be pleased with it.
“It would be great if Trump could lower the corporate tax rate, because a lot of my business clients say — and it’s true — if I didn’t have so high of taxes, I’d invest more in my business, hire more people,” he said.
Shanker, who also leads the Paramus-based accounting firm’s Business Valuation and Litigation Support Practice, weighed in on the tax reform outline with the express caveat that not enough time had passed to study it closely, since it was announced Wednesday. That’s not to mention the questions that have yet to be answered by the would-be tax code overhaul’s authors.
Regardless of the specifics, Shanker said the truth is that nothing about the plan could drastically change the narrative for New Jersey’s vexed taxpayer.
“The feedback I get from all sorts of clients regularly is that the state’s taxes are just outrageous,” he said. “I have a lot of clients looking for other places to live and work to avoid those taxes.”
Taxpayer advocate Khurram Dara agrees that the issue for Jerseyans revolves around local policy.
“There’s nothing in the federal tax code other than the state and local deductions that really impact our property taxes — and we’ve got the highest property tax burden of any state,” he said. “That’s mainly why you see people leaving the state when the reason is the taxes.”
While the winds might be shifting on the federal level, Dara, an attorney and president of the nonpartisan, nonprofit Summit Taxpayers Association, believes there’s a cynicism about potential for such change in the Garden State.
“Separate from what’s going on at the federal level, there’s a whole lot in New Jersey itself that makes it tough on businesses,” he said. “Any kind of tax reform is welcome — but, as far as folks in New Jersey are concerned, I think a lot of people are resigned to the fact that taxes are going to be high in our state, regardless of who is in office.”
Still, things could get “a whole lot more painful,” as Shanker said, with the axing of the federal deduction for state and local taxes that was proposed under the administration’s tax outline. New Jersey’s residents benefit from this tax break at a total value that puts the Garden State above every state but New York and California.
A number of deductions are slated for elimination or further limitations under the framework, potentially including deductions related to real estate — an area Shanker said many Jerseyans also may not appreciate changes to.
One proposed change that’s particularly notable for the business community is a limit on the income taxes applied to pass-through entities, often small businesses conducted as a sole proprietorships or S-corporations. The tax rate for these business structures would be capped at 25 percent, down from the top individual tax rate of 39.6 percent it can reach today.
Trump’s pick to head the U.S. Small Business Administration, Linda McMahon, in a statement praised the tax framework as holding potential for small businesses, which accounts for the grand majority of the Garden State’s industry.
The rest of Trump’s administration and GOP leaders have declared the plan to be a boon for businesses small and large. Shanker said it’s possible, however, that larger businesses would see much more of a boost under the new structure, given the difference between the 25 percent cap on pass-through business taxes and the lower 20 percent corporate tax rate.
The proposal could look different by the time it becomes policy — if it makes it that far.
And there’s a telltale sign of when people are starting to believe a change like this might actually become the new law of the land: the sound of phones ringing at accounting firms.
“In the past, we’ve gotten a lot of calls and inquiries as to what a change like this is going to mean for clients,” Shanker said. “But, I think it may be too early — given the track record of Congress and the new administration — to say whether it will for sure get done.”