Plan to trump tax cap may be crazy like a fox

When is a tax payment not a tax payment, but a charitable contribution instead? Well, maybe, when New Jersey municipalities say so. At least that’s the hope behind a plan being pushed by U.S. Reps. Josh Gottheimer and Bill Pascrell.

In response to the new federal cap on the deduction for state and local taxes — a change expected to hit New Jersey’s wealthier communities particularly hard — Gottheimer and Pascrell (both D-N.J.) propose allowing municipalities to set up charitable trusts to which property owners could “contribute” amounts equal to their property taxes.

The new federal tax law allowed charitable contributions to remain 100 percent deductible, while capping deductions for state and local taxes at $10,000. With annual property tax bills of more than $10,000 all too common in parts of New Jersey, the taxes-as-charity plan could amount to a significant savings for many New Jersey residents.

It’s hard to believe it could be that simple. And, in fact, critics say the proposal is neither simple nor something the Internal Revenue Service is likely to allow.

The Tax Foundation, a conservative group, is opposed. It argues that deductible charitable contributions must have a “genuinely charitable aspect” and cannot primarily benefit the person making the contribution. Others question how a “contribution” that someone is required to make could possibly be, in fact, a contribution.

So, there’s definitely an “Alice in Wonderland” aspect to all this.

But at least three New Jersey municipalities — Fair Lawn, Paramus and Park Ridge — are actively pursuing the plan. Phil Murphy and the New Jersey Chamber of Commerce have endorsed it. And other states are considering similar systems.

The support for the proposal — and the hope that municipalities will actually get IRS approval — hinges on the fact that some 22 states already give residents tax credits for fully deductible contributions to certain charitable funds that support public needs such as education, according to Gottheimer.

“There is precedent, and that’s the important point here. The IRS has sanctioned and blessed this provision, this approach,” Murphy has said.

New Jersey, of course, has the highest property taxes in the nation. The average bill in Fair Lawn is more than $13,000. And Murphy has proposed a host of expensive programs that he acknowledges will result in tax increases.

So, you can bet he’s all for helping New Jersey residents pay less in federal taxes — he could point to that savings as he raises state taxes.

Many conservatives favor the cap on the deduction for state and local taxes as a way of forcing high-tax states such as New Jersey to lower their tax burden. But the cap on this deduction was clearly aimed at blue states such as New Jersey, which already pays more to the federal government than it gets back in federal spending.

While it may be pretty to think that the federal change could prompt lower taxes in New Jersey, that’s not likely to happen in the next four years. So, if Gottheimer, Pascrell and Murphy can pull off this scheme, we’ll take it.