Close Close

Financial Planning > Tax Planning > Tax Deductions

4 States Sue Feds Over Caps on State and Local Tax Deductions

Your article was successfully shared with the contacts you provided.

Four Democratic-led northeastern states sued the Trump administration to invalidate the new $10,000 cap on the federal tax deduction for state and local taxes that they say unfairly targets them.

New York, New Jersey, Connecticut and Maryland claim the sweeping 2017 federal tax law overturned more than 150 years of precedent. The state and local tax deduction is essential to prevent federal tax powers from interfering with constitutionally guaranteed state rights, according to the lawsuit.

(Related: State Tax Deduction Workarounds Likely to Hit Snags)

The tax law resulted from a “hyper-partisan and rushed process” that will disproportionately harm taxpayers in the four states, New York Attorney General Barbara Underwood said in a statement. Underwood said a state analysis found that the cap will increase New Yorkers’ federal taxes by $14.3 billion in 2018 alone and another $121 billion between 2019 and 2025.

According to the complaint, filed Tuesday in Manhattan federal court, the new cap on the so-called SALT deduction will make it more difficult for the four states to maintain their taxation and fiscal policies, thus “hobbling their sovereign authority to make policy decisions without federal interference.”

‘High Stakes’

The Treasury Department said it’s reviewing the complaint. The Internal Revenue Service, which is also named in the suit, declined to comment.

Tom Corrie, a New York lawyer who directs the state and local tax group at the accounting firm Friedman LLP, said the “stakes are very high” for the states because the cap is already harming their real-estate markets and making the states less attractive for high-income workers.

“I anticipate there will be other states joining the suit and that will increase the likelihood of success,” said Corrie, who isn’t involved in the lawsuit. “Both the federal government and the states will enter this judicial battle ’fully loaded’ and prepared for an extended conflict.”

The tax law, enacted in December, prompted some local governments to revise their rules in a bid to facilitate the last-minute change in federal tax strategies, while homeowners in states with the highest property taxes quickly began looking to prepay 2018 bills ahead of the cap.

The federal government “went after these states deliberately” in crafting the SALT deductions cap, New Jersey Attorney General Gurbir Grewal said in a statement.

“Simply put, the federal government violated the constitution when it imposed new, arbitrary limits on the amount of state and local taxes that residents could deduct on their federal tax returns,” Grewal said.

Connecticut Governor Dannel Malloy said his state’s residents stand to lose $10 billion in SALT deductions. He said the new tax law gave “massive” handouts to the wealthiest one percent at the expense of middle-class taxpayers.

“Despite massive economic promises from Republicans, real wages have actually decreased since the passage of the tax cut,” Malloy said in a statement. “At the same time the deficit has exploded by $1.5 trillion, providing a convenient excuse for GOP lawmakers to pursue their longtime goal of gutting Medicare, Medicaid and Social Security.”

Conservative economist Stephen Moore, who advised President Donald Trump’s campaign on tax policy, is quoted in the complaint as saying the change in the SALT deduction is “death to Democrats.” Another conservative commentator, Ramesh Ponnuru said in a November 2017 article in the National Review the “fact that these tax increases will fall most heavily on ‘blue’ parts of the country is obviously not an accident,” according to the complaint. Ponnuru is a senior editor at the National Review and a Bloomberg Opinion columnist.

Republicans targeted the states to force them to reduce public funding for safety, schools, infrastructure, transportation and other services, the four states claim.

The suit highlights the history of the Sixteenth Amendment, which confirms that the federal government’s tax power has limits, Underwood said.

“At the time of the amendment’s ratification, it was widely understood that, to the extent the federal government taxed income, it would provide a deduction for all or a significant portion of state and local taxes,” the suit says.

The case is State of New York, 1:18-cv-06427, U.S. District Court for the Southern District of New York (Manhattan).


© 2023 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.