The Internal Revenue Service’s proposed denial of a workaround for the $10,000 federal cap on state and local taxes is likely to spell bad news for New Jersey’s credit rating, Moody’s Rating Agency said Tuesday.
Moody’s, one of the three main Wall Street ratings agencies, issued a “credit negative” for New Jersey on Tuesday, saying the cap would hurt high-tax states and reduce the amount of money available for local and state governments.
A credit negative does not equate to a credit downgrade, but it’s an indicator that New Jersey, which has already undergone 11 downgrades, could potentially see one in the future.
The lowered cap would likely depress housing price growth in New Jersey and remove incentives for homeownership, thereby curbing the growth in property values, said David Jacobson, a spokesperson for Moody’s.
“Depending on how taxes are structured and local governments' capacity to raise them, reduced assessed value growth will also reduce growth in property taxes,” Jacobson added. “With a cap on SALT deductions, voters in some municipalities will be more likely to reject tax increases because they will not be partially offset by a federal tax benefit.”
In May, Gov. Phil Murphy signed legislation that would enable residents to pay their property taxes as charitable contributions to their towns, which they could then deduct from their federal tax returns. Moody’s noted in its report that other “high-tax jurisdictions” such as California, Connecticut and New York passed similar measures.
The IRS responded in August with its proposal to close the loophole by mandating that if a taxpayer received a benefit from their local government for state or local taxes, they’d have to reduce the amount claimed for charitable deductions on their tax returns.
In turn, Murphy and New Jersey Attorney General Gurbir Grewal vowed legal pushback against the IRS’ proposals. New Jersey is already active in a suit against the IRS, alleging the federal government’s cap is a form of political retaliation against the state.