New Jersey governor signs bill creating workaround to Trump tax law provision

New Jersey Gov. Phil Murphy (D) signed bipartisan legislation on Monday aimed at helping small business owners who were adversely affected by the $10,000 cap on state and local tax (SALT) deductions under President Trump’s 2017 tax law.

So-called pass-through businesses, such as partnerships and sole proprietorships, will soon have the option to pay state income taxes at the entity level rather than at the individual level. The Trump tax law only created a cap on deductions for state and local taxes paid at the individual level.

The New Jersey law takes effect for the 2020 tax year.

The authors of the legislation said the law could help small business owners save money, since most small businesses in New Jersey pay taxes through the personal tax code. Other businesses organized as pass-throughs include law firms, accounting firms and medical practices.

“This law will help to defray the out-of-pocket income tax hit for small business owners here in New Jersey and help alleviate the inequities created by the federal tax law,” state Sen. Troy Singleton (D), one of the authors of the legislation, said in a statement.

State lawmakers worked on the legislation with the New Jersey Society of Certified Public Accountants (NJCPA). The group praised the enactment of the measure.

“We are grateful to the Governor, the Legislature and all those who supported the bill,” NJCPA CEO and Executive Director Ralph Albert Thomas said in a statement. “Their dedication to assisting small businesses in New Jersey does not go unrecognized.”

Congressional Republicans argue that the SALT deduction cap is important because it reduces the federal tax code’s subsidy of states with higher taxes like New Jersey. They also point out that most people, even in higher-tax states, have received a tax cut under the 2017 law.

But policymakers from high-tax states have argued that the deduction cap unfairly punishes residents of their states and makes it harder for those states to offer robust public services.

The bill Murphy signed into law this week isn’t New Jersey’s first effort to mitigate the impact of the SALT deduction cap. Murphy signed legislation in 2018 aimed at allowing people to convert their local property tax payments into charitable contributions that could still be fully deductible on federal tax returns. However, the IRS has issued guidance to prevent that type of program as a workaround to the deduction cap.

New Jersey, New York and Connecticut have filed a lawsuit to challenge that IRS guidance. The three states and Maryland are pursuing a separate legal challenge to the deduction cap itself.