State associations cool to proposed property tax cap workarounds

Some states are considering work-arounds to avoid property tax deduction cap, state associations are skeptical

State associations in New York, New Jersey and California are giving a cool reception to their states’ efforts to circumvent the $10,000 cap on state and local property tax deductions. Maryland may also float a similar plan.

Execs, and their county members, are concerned about the long-term effects of the federal tax overhaul, which they fear could disrupt real estate bases and populations, as residents could move to states with more lenient tax climates.

And help seems to be on the way. In California, it’s the Senate President Pro Tem’s proposal. A U.S. Representative from New Jersey ran with a suggestion by outgoing Gov. Chris Christie (R), which has been picked up by his successor, Phil Murphy (D). And New York Gov. Andrew Cuomo (D) highlighted a proposal in his Jan. 16 budget address.

Each plan would create charitable funds to which homeowners would make contributions equal to their state and local property taxes, for which they would receive federal tax deductions and state tax credits. Cuomo added a proposal to switch to a payroll tax to avoid income tax hikes, though acknowledged it wouldn’t necessarily be a dollar-for-dollar tradeoff.

Steve Acquario, executive director of the New York State Association of Counties is looking forward, with some fundamental reservations, testifying on the plan Feb. 5 and seeing what the final budget becomes by April 1.

“We haven’t seen anything yet, but I don’t think it’s the right way to run a government. Government operations should be funded through taxation,” he said. “(The charitable entity plan) further blurs the lines and confuses the public, but we don’t fault the man for trying and looking into what options are out there.”

Dorothy Johnson, a legislative representative with the California State Association of Counties who handles taxation issues, saw similar pitfalls in a state Senate President Pro Tem Kevin de Leon’s (D) bill to establish the California Excellence Fund to the same end as Cuomo acknowledged.

“Charitable deductions are not usually given on a quid pro quo, a dollar-for-dollar match. There’s that expectation,” she said. “Last time I checked, California is not a nonprofit, so I’m not sure how we’d qualify under our own statutes to get this exemption or deduction qualified.”

John Donnadio, executive director of the New Jersey Association of Counties, said whatever maneuvering states do to avoid the property tax deduction cap could be headed off federally by policy changes at the Internal Revenue Service.

“All of that work might be for nothing,” he said. “I have a hard time buying that the IRS would just let this happen.”

Bergen County-based Rep. Josh Gottheimer (D-N.J.) said the IRS has respected programs in 22 states that are similar to the charitable deduction plan, citing many conservation easements and tuition scholarships. Like in New York and California, he proposes setting up funds to support different services, including education, infrastructure and law enforcement. Roughly half of Bergen County’s homeowners paid more than $10,000 in property taxes in 2015.

Murphy, who took office Jan. 16, is open to a suggestion floated by Christie to allow homeowners to write-off their entire property tax bill, Politico reported.

Acquario pointed out that Cuomo’s proposal to switch to a payroll tax from an income tax would not work for government workers, including county employees.

In the meantime, counties are trying to divine how the federal tax policy change will affect them.

“We have people paying $15,000, $20,000 a year in property taxes, and this policy is really going to impact the real estate market and our ratable bases, and that’s really concerning,” Donnadio said.

It may be enough, execs theorize, that people may leave.

“The circumstances are quite dire and everything is on the table,” Acquario said. “Our counties, especially downstate (near New York City) have a grave concern over economic migration of our population with higher income range to states where the tax climates are more favorable to them.”

Median tax rates in Nassau, Rockland and Westchester counties all topped $10,000 in 2015, meaning half of these high-population counties are losing out in the new tax plan.

“About 20 million people are very nervous about how this is all going to turn out,” Acquario said. “We won’t know the true impact until 2023, maybe longer. We don’t want to sit around and wait, and the state is trying to protect itself.”

In mid-January, The Frederick News-Post reported that Maryland democratic leaders and Republican Gov. Larry Hogan planned to introduce legislation aimed at brunting the tax overhaul’s impact, including a bill adding new charitable deductions.