Well, maybe two out of three in New Jersey.
A think tank in that state, New Jersey Policy Perspective, recommends in a recent report eliminating the state income tax deduction for 401(k) contribution.
The report, IF IT AIN’T BROKE…New Jersey’s Income Tax Makes Dollars and Sense says that New Jersey’s problems can be solved by increasing the state’s income tax by approximately $1 billion. Half of that increase, or $500 million, would come from eliminating the deduction for 401(k) contributions. This would also, says the report, eliminate an inequity in the way the state treats retirement savings. Here is their reasoning:
The few deductions and exclusions allowed by New Jersey’s income tax code create a more equitable system because more income is taxed and special preferences are minimized. The state’s treatment of retirement income is one of the few exceptions. Those making contributions to 401(k) retirement plans in New Jersey can exclude the amount from their taxable wages, but no deduction from taxable wages is allowed for contributions made to SEP IRAs, Simple IRAs, ROTH IRAs, Federal 457 plans, 403(b) plans, Traditional IRAs, Keoghs and 414(h) plans.
Equity in taxation requires that all taxpayers in similar circumstances be treated alike. Taxpayers would continue to get a federal deduction so there is still incentive to save for retirement.
What’s next? The mortgage interest deduction?
Hat Tip to Randy Bergmann’s Blog.