A lot of questions about the impact of federal tax law on New Jersey. Business Correspondent Rhonda Schaffler got some answers from former state Treasurer Andrew Sidamon-Eristoff.
Schaffler: Andrew, we’re so happy you’re here. You’ve been writing a lot about the changes in the federal tax law on implications for New Jersey and there’s a lot to cover, so thank you for your time.
Sidamon-Eristoff: Happy to be here.
Schaffler: One issue that’s kind of been all the rage is how do you get around the SALT deduction. How do you “fix” a problem for New Jersey residents who pay high property taxes? One of the ideas has to do with setting up a charity donation. It’s something that, in your words in an op-ed that you wrote, “We’ve got to call a flag on this play.” What’s the issue legally, you think, with some of the conversations we’re hearing?
Sidamon-Eristoff: Well, first of all I want to emphasize that I’m not here to defend the new federal tax law. I think it is unfair to New Jersey and New Jerseyans. That having been said, the idea of using a charitable deduction to get around the new limitation on deducting state and local taxes is really a gimmick that won’t work and I’m afraid that some people will be hurt, potentially, if this goes forward. It violates two basic principles of tax law, long-standing principles. First, you can’t deduct a charitable donation to the extent that you receive something of value in return, and the whole point of this scheme is to deliver an economic benefit to the taxpayer. Second, you can’t elevate form over substance as a general matter in tax. So, in other words you can’t recast a transaction to change its fundamental nature. In this case, it’s not permissible to dress up what is in fact a tax payment as a charitable contribution because, at the end of the day, it’s still a tax payment in substance.
Schaffler: We certainly have seen some local and state officials talk about this as an option. Is it just misguided? Should there be a different way to approach the conversation? Or is it, to your point, you know, unfortunately we’re out of luck.
Sidamon-Eristoff: I think this particular proposal is a nonstarter, legally. There are other proposals out there. For instance, in New York state, the governor has called for the creation of a payroll tax. That mechanism might work from a legal standpoint, but as many observers have said, it’s incredibly complicated. So it remains to be seen whether, as a practical matter, it’s a viable solution. I’m quite skeptical, but I don’t have the same level of legal skepticism as I do with respect to this charity workaround idea.
Schaffler: When Gov. Christie was in office, he talked about potentially allowing a full state and local deduction on your New Jersey state income tax so at least you get a break there. There was legislation introduced; as of today, it’s not been reintroduced in the new Legislature. But is that perhaps a better workaround just to say, listen we can’t really win on the federal side, but we can control what happens on the state side.
Sidamon-Eristoff: I would agree. I know there are several members of the Legislature that are continuing to pursue that. Right now we have a $10,000 limitation on the deduction against your state taxes. New York state, for example, doesn’t have that limitation, so I think it would be a nice way to mitigate some of the impact that these federal tax changes to lift that cap and allow a full deduction for property tax. But, I don’t want to oversell this. This is not going to be a complete solution to the impact that this new tax law has on New Jersey and New Jerseyans.
Schaffler: And it’s hard to get around that. I mean, there’s a limit to what you can do in the state, as you well know having served for a governor, when the state has its own issues financially.
Sidamon-Eristoff: Right. Unfortunately, the bottom line is that we are a high-tax state and the only way to really address this would be to reduce our tax burden and that involves some pretty hard choices.
Schaffler: Andrew, you have also touched on an impact for businesses under this new law. We should touch on that because there’s not been a lot out there just yet, so you have some concerns there as well?
Sidamon-Eristoff: I do. Most of the public discussion about the new tax law has focused on the limitation on state and local tax deductions, personal income tax issues. But if you look at the actual federal bill, most of it is actually about business tax changes. In particular, changes to the way the U.S. taxes international transactions. Many of those changes will flow through or impact the way business taxes are calculated here in New Jersey. And I am just very concerned that we understand the full impact of those changes and we take steps as soon as practicable to address any unintended consequences. There are, depending on the federal provision, there are provisions which might raise revenue unexpectedly against New Jersey businesses, and there are other provisions that might lead to a tax windfall. And the bottom line is that a lot of this is pretty murky stuff — very, very complex — and it requires a systematic, line-by-line review of the federal tax bill at the local level here.
Schaffler: Should there be a do-over of that federal tax bill? There seems to be a lot of people that just aren’t happy with it. I mean, if nothing else too, it’s also expanding the deficit.
Sidamon-Eristoff: Yes. Well, I think the tax bill was in many respects ill-considered. It does negatively impact New Jersey, New York, Connecticut, other high tax states, of course. But, there are other things about it that I’m troubled with. For instance, it creates a special benefit for so-called pass-through entities, for certain kinds of pass-through entities, which are like S corps or partnerships. And, the trouble is those rules are going to be very, very complicated, if not impossible, to administer in a fair way. So, you’re going to have lots of taxpayers employing lots of tax attorneys and tax accountants to figure out the best way to reduce their federal tax exposure. And I think, frankly, it’s a mess and it’s going to lead to a lot of uncertainty and the only people who will really benefit are tax practitioners.