The tax reform bill has passed, and with that, residents of the Borough of Collingswood are about to undergo some drastic changes in the way we will live…
To be clear, the IRS is in the process of issuing standard rules on the new law and could curtail (to a limited degree) some of these developments, but regardless, some things are coming down that’s going to change the way you file your taxes and live their lives. At this time, you should contact your accountant / CPA to get a better understanding of how this is going to impact you and your family.
In the meantime, you should get a copy of the Tax Reform and read it yourself; it’s rather illuminating – if not depressing – to say the least.
And the Reconciliation of the Tax Reform bill: https://www.congress.gov/bill/115th-congress/house-bill/1/text
For most folks, it’s going to come down as follows:
Removal of Key Federal Tax Deductions
You will no longer be able to take the full deduction on your state and local property tax. Instead, you’ll have a flat rate of $10,000 in which you can deduct. Businesses, however, can still deduct the full amount of their property taxes.
You’ll be able to deduct your mortgage interest, but with the following caveats:
a) The property purchase limit is down from $1 million to $750,000
b) You can no longer deduct your home equity loan, removing one significant advantage of home ownership.
c) Got a second property with a mortgage? Sorry; you can no longer deduct it. For those with shore homes or places in the Poconos, things just got a little irritating.
(For more about the impacts, check out https://www.nytimes.com/2017/12/16/business/the-winners-and-losers-in-the-tax-bill.html as well as http://money.cnn.com/2017/12/17/real_estate/tax-bill-mortgage-property-tax-deductions/index.html).
Advance refunding bonds are no longer tax exempt. It is a somewhat obscure but notable change to the bond law. Before the Tax Reform bill, public entities could re-finance their existing bonds for more competitive rates (similar to doing a debt consolidation loan). The issuer would sell a new series of bonds and use any available proceeds to purchase securities (in New Jersey, it’s usually US Treasuries that are acceptable). This option increases the amount of tax-exempt income, while reducing the rates at which bonds were initially issued.
Although this could be a good thing for existing bonds (as this would limit the number of tax-exempt bonds on the market, thus enhancing the value of existing bonds), it also removes an essential tool used to manage interest loan rates through bond consolidation in reducing a bond’s long-term financing costs.
To learn more what this means, check out this site (it’s a little heavy on the public finance geek side, but it still gives a good overview for what some public entities – read: public financing for major projects – are going be facing: https://www.publicfinancetaxblog.com/2017/12/inconceivable-congressional-repeal-of-tax-exempt-advance-refunding-bonds-might-not-generate-the-revenue-that-congress-thinks-it-will/).
The tax reform bill is an 800-page document, and there is much, much more within the tax reform legislation, but suffice to say these are the primary point of consideration at this time when considering our educational funding challenges.
Intermediate Potential Impacts of the Tax Reform Bill
One likely impact is going to be a loss of house values, as the advantages to renting versus owning a home will soon become more evident (some estimates place this drop of home values between 10% to 17% per house within the next several years).
In states with a heavy reliance on property tax (like New Jersey) this tax reform could prove to be problematic. As the assessed values decline and sellers move out, a potentially vicious cycle could develop whereby local governments will need to raise taxes to make up any developing local tax shortfalls, and in turn, drive out more taxpayers. By creating higher ‘churn’ or housing sales, we will only be further escalating the situation. (Check out this article and see where Camden County lies: http://www.businessinsider.com/tax-reform-affect-on-home-prices-2017-12).
People who own second homes are going to now seriously consider either selling their rental properties or increasing rental costs to make up the shortfall resulting from federal tax increases. The New Jersey shore as we know it is likely going to face some big changes in the years ahead, what with people selling their homes and/or raising rental rates.
Additional challenges for finding occupants for these homes include rising waters, changes to flood insurance premiums, and the damage caused by increasing storms (due to climate change). Similarly, other investment properties are going to be hard-pressed to derive higher value, as localities undergoing their respective ‘renaissance’ are facing a changing real estate environment which could curtail local growth.
Ironically, in the face of declining house values and the likelihood of owners selling to move into rental properties, affordable rental properties may also become hard to find. As folks going this route are going to create demand for rental property – and with likely increases in rents for those who have always rented.
More Projects on the Horizon: the Public Safety Complex and Growing Infrastructure Costs
Another project is in the near future for Collingswood. A borough tax increase is possible to pay for the long-overdue public safety complex. Many are facing what is potentially a perfect storm on their household finances. Other borough concerns like aging water pipes, streets, and other public structures and infrastructure mean that municipalities are going to be even more hard-pressed to keep things going- so tax decreases and freezes are not likely.
Other Developments On the Horizon
Some will see a slight increase in their paycheck- owing to a slight reduction in federal taxes which is a part of Trump’s Tax Plan; Which will not end up helping much after considering not being able to deduct property taxes and mortgage interest. But this is only temporary: come 2019, that too will also go away, leaving many of us facing a much tighter financial reality.
There has been talk of Trenton lifting the 2% cap for taxes, but many are opposed to this as well (I recall the days when you could expect anywhere from 5% to 8% annual – in one year – property tax increases!). Understand: there is a strong historical basis for this cap.
But the most significant talk (more like hushed whispers) is that involving the Pension system. New Jersey’s public employee pension system – police, fire, civilian – has come onto very had times and with that, repayment the pension system is going to consume a sizable portion of the total state budget. So any talk of additional school funding coming from the state is not concrete.
To be sure, legislators in New Jersey recognize the need for quality education, but whether or not they will be able to deliver in light of pressing needs remains to be seen.
Any Options Worth Considering?
But there is one development that bears mentioning – and one that perhaps the residents of Collingswood should push for from their local elected officials: the establishment of charitable trusts.
With the recent proposal of creating local charitable trusts, tapsters could (if/when set up) pay into a charity instead of getting a direct tax break to make up for the shortfall owing to new federal tax laws.
More specifically, residents could pay into the stadium costs or improve school playgrounds by way of this trust, thus lessening any potential tax increase impact or redirect funding toward specific needs projects (construction to improve accessibility for students with disabilities, school gardens, food programs, sports programs, etc.). Similarly, the municipality could also use this funding to conduct improvements within the borough.
Another option is for athletic clubs to be formed and be established as 501(c)3 non-profits. Traveling Soccer clubs are doing just this. These clubs would have to contract with the local schools for utilization of the facilities and fields. Fees would be negotiable, and by doing so, grant funding opportunities could become more feasible and viable. Having clubs come together to partner with the local schools, and corporate sponsors would reduce the need for public taxes being the method for funding facilities and repairs.
The trick is, however, it takes money to give money. In effect, your deductions would be most helpful. Additionally, you would gain a tax credit for your donation, but it would be dependant on each households’ budget and the priorities of spending in that household.
But some money is better than no money. There’s nothing limiting folks from reaching out to private entities to seek tax deductions of their own, and to become more involved. So rather than giving ‘donations’, private entities could receive tax deductions of their own. A significant impact can happen where there is a matching funds arrangement: for every dollar raised by residents, private entities would match those funds. With the tax deductions benefitting all and therefore lessening the need for any tax increase.
The Bottom Line
Public spending is going to be a far more demanding and politically dangerous and unforgiving gambit. Entities seeking to raise taxes will do so at their political peril. Taxpayers are hemmed in by the loss of deductions and increasing costs, while their prime investments – their homes – will likely face decreased long-term value. Borrowing against a house’s equity is still possible, but will be more costly when you can no longer deduct loan interest.
Public entities are going to have fewer options to raise bond financing, and will also face far greater opposition to any potential tax increase.
New Jersey will now face severe pressure to offer programs and support that many have come to rely on and then pass that burden on down the line to the counties and local governments. Funding programs – such as educational services – will be less likely in the coming years, facing local municipal bonds of education to come up with ways to deal with the impending shortfalls just to fund existing programs, let alone go into the severe financing of big-ticket projects at increasing costs.
Welcome to the future.