NJ Joins IRS Lawsuit Over Federal Tax Deductions

SOUTH ORANGE, NJ – Standing at the podium in the Village of South Orange, Governor Phil Murphy said New Jersey is joining with New York and Connecticut in a lawsuit against a federal tax law that limits write-offs for state and local taxes (SALT).

Murphy said that the Trump Administration’s repeated efforts to unfairly target them prompted Attorney General Gurbir S. Grewal to file a federal lawsuit against the Internal Revenue Service (IRS) and the U.S. Treasury Department.

“This is not a fight we asked for, but it is one we are proud to wage – on behalf of our taxpayers, and the countless others in our fellow states who are realizing now that they are financial collateral damage to the Trump administration’s rank politicization of the tax code,” said Murphy. “We are committed to fighting Washington to end this unfair and unconstitutional tax on New Jersey’s taxpayers.”

Filed in the U.S. District Court for the Southern District of New York, the lawsuit seeks to strike down a new IRS rule that would prevent New Jersey residents from obtaining a full federal charitable deduction whenever they contribute to local governments and other qualifying institutions and receive tax credits in return.

Murphy made his comments at the South Orange Fire Department, which Village President Sheena Collum said was the right place for it.

"With close to 10 percent of our population being 65 years or older, what we’re seeing is a flight, a massive flight of our senior citizens and that is not sustainable,” said Collum.

The federal government began targeting states like New Jersey two years ago when it enacted a 2017 tax overhaul that placed, for the first time, a $10,000 cap on the federal deduction for state and local taxes (SALT). The SALT cap disproportionately harmed taxpayers in New Jersey, Connecticut, and New York.

At the time, U.S. Treasury Secretary Steven Mnuchin – named as a defendant in today’s lawsuit – confirmed that the SALT deduction cap was intended to “send a message” to states like New Jersey that they would need to change their tax policies.

To ease the burden of New Jersey taxpayers, Governor Murphy signed S1893/A3499 into law, which allowed residents to make charitable contributions to qualifying local institutions, and to receive partial tax credits of up to 90 percent against their local property tax bills when they did so.

“Our message to the IRS today is simple. No matter how many times you change your rules – from capping the SALT deduction to reversing your longstanding approach to charitable donations – we will challenge you in court,” said Grewal. “Our residents already pay more to the federal government than we get in return. That is why I remain committed to standing up for New Jersey taxpayers in the face of this onslaught coming out of Washington.”

At least 33 states have developed over 100 charitable contributions programs, similar to the one established by S1893/A3499, that provide a state or local tax benefit in return for a charitable contribution to a qualifying entity under Section 170(c). These programs incentivize individuals to donate to causes ranging from natural resource preservation and aid for higher education to domestic violence shelters. The IRS consistently treated charitable contributions made pursuant to these programs as fully deductible under federal tax law.

But when New Jersey, New York, and Connecticut decided to establish such programs, the IRS changed its mind, and issued a new rule aimed at nullifying the tax benefit New Jersey was making available to charitable givers.

“This is another unfair attack on our states coming out of Washington,” said Grewal. “These tax credit programs were fine when 33 states had them. But when New Jersey, New York and Connecticut followed suit, the IRS adopted brand new rules to shut them down. As I promised when the IRS first proposed this rule, we’re taking the IRS to court to fight back.”

Republican Senator Steven Oroho said that the lawsuit amounts to window dressing and won’t provide meaningful, long-term property tax relief to New Jersey families.

“New Jersey homeowners are the most overtaxed residents in the United States,” Oroho said in a statement. “The lawsuit announced today does very little to address that. The better approach would be to fix the state’s underlying tax problems that make the SALT limitation an issue. Governor Murphy can help make the Garden State more competitive and accomplish real savings for taxpayers by getting behind the Path to Progress reforms that have bipartisan support in the Legislature.”

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