Democrats Paul Sarlo and Troy Singleton and Republicans Steve Oroho and Anthony Bucco announced theinitiative Monday during a Statehouse news conference where they said the proposed small business workaround to the federal tax law would save some 260,000 New Jersey individuals and families an estimated $23 billion that would have been subject to federal taxes because of the new $10,000 cap on the federal deduction for state and local taxes.
TRENTON — A bipartisan group of senators announced plans Monday for legislation intended to allow many small businesses and partnerships to work around a provision of the new federal tax law capping how much they can write off for state income taxes.
Democrats Paul Sarlo and Troy Singleton and Republicans Steve Oroho and Anthony Bucco announced the bipartisan initiative at a Statehouse news conference, where they said the proposed small-business workaround to the federal law would save about 260,000 individuals and families an estimated $23 billion that would have been subject to federal taxes because of the $10,000 cap on the federal deduction for state and local taxes.
The cap is likely the most controversial component of the new tax law in New Jersey and other high-taxed states because it limits how much residents can write off from their income and property taxes.
Sarlo, D-36th of Wood-Ridge, and the other lawmakers said so-called pass-through businesses and partnerships that pay taxes through their owners’ personal income returns rather than the state or federal corporate taxes are also in danger of getting hurt by the cap. Their proposed legislation, which is still being drafted, is intended to protect them by reclassifying their income tax payments as a business tax rather than personal income.
By doing so, those businesses will be able to write off the state income tax payment because the federal tax law’s $10,000 cap does not apply to businesses.
Sarlo said New Jersey previously taxed pass-through businesses the same way until 1993, which makes him confident the workaround will survive IRS scrutiny.
“Essentially, we’re going back to the future with a solution that’s IRS-proof,” he said.
Because the businesses’ tax rates would remain the same as the personal income tax rates, there would be no loss of revenue to the state.
Oroho, R-24th of Franklin, and Singleton, D-7th of Palmyra, said the proposed change is crucial to protect most of the state’s small businesses and keep the state competitive in attracting and retaining businesses.
“Every state has to react, and this is a very important thing for us to allow these pass-through entities to pay (state taxes) and deduct through their federal tax returns,” Oroho said.
“This is something essentially to help our small businesses throughout the state, and it’s important because our small businesses are the primary job creators in the state of New Jersey, and we should never forget that,” Singleton said.
Michael Egenton, executive vice president of government relations for the New Jersey State Chamber of Commerce, said the proposal looks promising.
“Anything that helps small business we’re in favor of,” Egenton said, adding that the state’s economy relies tremendously on small businesses and the jobs they provide.
The legislation is the latest initiative undertaken by lawmakers in the wake of the sweeping federal tax rewrite, which was approved by Congress in December with no Democratic support before being signed by President Donald Trump. Among the other changes in the law are a greatly reduced corporate tax rate, lower individual rates, and an enhanced standard deduction and child credit.
Gov. Phil Murphy and other critics of the tax law contend that its cap on the state and local tax deduction was written to hurt so-called blue states like New Jersey, New York and Connecticut that have large numbers of registered Democrats and Democratic-controlled governments.
Murphy has already urged New Jersey to join an expected legal challenge of the cap with New York and Connecticut, and has also urged counties and municipalities to create charitable funds and tax credits to which residents can contribute to support government operations, in return for a partial tax credit on their property tax bills.
Since a deduction for charitable contributions remains part of the federal tax code, residents would be able to write off what they contribute on their federal taxes.
Legislation to allow towns and counties to create those kind of charitable contribution workarounds was approved by the Senate last month but is pending in the Assembly.
Sarlo said the small-business workaround is separate from that measure, which was opposed by Oroho and other Senate Republicans.
The new legislation is being written amid growing debate over Murphy’s plan to call on the Legislature to approve a state income tax surcharge on earnings over $1 million to help provide more revenue for public schools and to shore up the underfunded pension systems.
Senate President Stephen Sweeney, D-3rd of West Deptford, has spoken against the tax increase, arguing that it could drive businesses and wealthy residents out of the state because they can no longer write off all of their property taxes or state income taxes on their federal taxes.
Pass-through businesses would still be subject to the so-called “millionaires’ tax” if it is approved, but the proposed workaround would allow them to continue to deduct the full amount of what they pay in state taxes from their federal returns, officials said.